Wall Street Journal reporter Nick Timiraos, who is considered an important figure on FED policies, warned that the recent interest rate cuts may not be enough to ensure a soft landing for the US economy.
“Despite FED's Interest Rate Cuts, It May Not Achieve a Soft Landing”
While lower borrowing costs are generally intended to spur investment and spending, Timiraos suggests the actual impact of these reductions will depend on deeper economic factors.
Timiraos explained that the success of the Fed’s rate cuts will depend on the current level of weakness in the U.S. economy and whether businesses and consumers are willing to borrow under the new conditions. “Despite lower interest rates, many businesses and households may remain hesitant to borrow because the new rates, while lower, may be higher than the rates locked in years ago on fixed-rate loans,” he said.
The biggest challenge, Timiraos said, is the disparity between the marginal cost of debt, which is falling, and the average interest rate on existing debt, which could continue to rise. Many businesses and households took out loans at historically low interest rates before the Fed began raising interest rates. Despite the recent reductions, the average interest rate on debt across sectors remains lower than the current cost of new credit.
This gap could limit the stimulating effect of rate cuts, as borrowers may choose to hang on to existing, lower-cost loans rather than take on new, potentially higher-cost debt. Timiraos argues that this reluctance to borrow could undermine the Fed’s ability to offset any economic slowdown with just low interest rates.
The Fed’s aggressive rate hikes over the past year, after more than a decade of near-zero interest rates, have changed the borrowing landscape. While the central bank is easing interest rates now, the transition from historically low borrowing costs has created complex dynamics for businesses and consumers. As Timiraos noted, it remains unclear whether the current economic strategy will work, and much will depend on how the market responds to these changing conditions.
As the U.S. economy goes through this transition period, the possibility of a soft landing, where the economy slows down without entering a recession, continues to be questioned.
*This is not investment advice.
