The main factors driving the Federal Reserve’s half-percentage-point interest rate cut in September were continued progress toward the Fed’s 2% annual inflation target and signs of increasing weakness in the labor market.

In June, the unemployment rate pushed back above 4% for the first time in two years. Job creation had slowed and job openings were edging down toward pre-pandemic levels.

The aim of lowering interest rates is to bring about a so-called soft landing for the economy, which in part means avoiding higher unemployment levels and more layoffs.

The Federal Reserve has two basic goals: to keep prices stable and maximize employment for American workers. This mission, known as its dual mandate, was legislated by Congress.

The central bank has mostly been questing after the first one during the past two years, keeping interest rates high to bring inflation under control. But this summer, cracks started to appear in the Fed’s jobs mandate.

“Inflation has come down a lot,” said former Fed economist Claudia Sahm, now at New Century Advisors. “It’s not 2%, but it is really close. And unemployment started creeping up, it started to get harder to find jobs. So things were starting to shift away — not in a dramatic way — but starting to move away from that maximum employment goal. We’ve seen some reluctance to go out and hire new workers.”

And that’s where the Fed starting to lower interest rates can help, making it cheaper for firms to borrow and invest in their businesses and giving a boost to consumers’ spending power.

“The hiring decision is one that you make if you’re going to expand your business,” said Sahm. “That could be you have more customers coming in, people who are out there spending. It could also be, can you borrow the money to expand the business, get the new equipment that would need the new workers? For the Fed, by making that investment path less expensive, that could get an employer over the hump of saying, ‘OK, I’ll go ahead and hire two more workers.'”

In real economic life, though, this is not an instant cause-and-effect from lower rates to more hiring.

¿Por Qué No? Taqueria is a bright, bustling restaurant in Portland, Oregon, where patrons line up — sometimes out the front door — to order their food: tacos, rice bowls, Mexican soups and salads.

Bryan Steelman, 50, is the owner. He founded the restaurant 20 years ago and now has two locations in town with about 115 employees. On a recent fall day, we sat in the new, 750-square-foot, all-seasons glass-enclosed patio dining room that he just opened at the original ¿Por Qué No? location. It took 2½ years of planning, permitting and buildout and cost several hundred thousand dollars.

“It was quite expensive, and we have taken loans to do it,” Steelman said.

So far, he feels it’s been worth it. Business was flat through the first nine months of the year, Steelman said, like most restaurants he knows of in town. “But our October since we opened this has been — it’s just skyrocketed. It’s by far the busiest October we’ve ever had.”

Steelman said interest rates gradually coming down would help him fund a similar renovation at his other taqueria in town. Plus: “We just recently expanded catering, and we are actually looking for a third spot.”

Which could eventually lead him to hire more workers.

There are sectors of the economy, like housing, where the Fed’s decision to cut short-term interest rates may have a quicker effect.

“Private homebuilders in particular are dependent on the cost and availability of builder and developer loans from local and community banks,” said Robert Dietz, chief economist at the National Association of Home Builders. Construction loans, he explained, “are tied to those short-term interest rates. So as the Fed eases down to 3%, that could lead to a decline of about [2½ percentage points] for builder and developer loans, which right now are in the 12%-to-14% range.”

Dietz said that will lead to an increase in the housing supply and more demand for construction workers, which he said the industry can accommodate over time.

Meanwhile, interest rates on auto loans have come down slightly. Bankrate reports new car loans are now running at 7.54%, compared to 7.71% before the Fed reduced rates; used car loans are now at 8.25%, compared to 8.33%.

“Eventually, more people buy cars,” explained Dan North, senior economist at Allianz Trade North America. “You need more people to build cars. And that’s how you stimulate the economy. It’s an indirect effect. Historically, it has worked.”

But now let’s throw a little water on the “rate cuts firing up the economy and job market” narrative.

Because after the Fed’s move in September, the Labor Department issued an unexpectedly strong September jobs report: 254,000 new jobs were added, and the unemployment rate fell to 4.1%. Then the September consumer price index rose 2.4% year over year, more than economists expected.

Chris Stanley, Moody’s banking industry practice lead, said it’s now less likely that the Fed will cut rates again soon. “There’s actually a little more resilience in labor markets, in consumer incomes and savings, than we thought in September. And so, preparing for that, either no more rate cuts for the remainder of the year or a much slower path to some of those lower rates than was anticipated, is really the smart way to play.”

Most analysts do anticipate rates will continue moving lower into 2025. And small and midsize businesses are waiting for that, said Joe Galvin at peer-advisory firm Vistage.

“It puts CEOs in a position, as they go into the strategic planning season for 2025, to think about making investments and capturing an interest rate that’s much better than what they’re seeing today, to invest in new facilities, new equipment, automation,” he said.

All that new investment will eventually require new workers — in construction, engineering, operations, sales. It’s just going to take a while.

Stories You Might Like

As the Fed holds interest rates steady, Powell says “it’s a difficult balancing act”

What is “maximum employment”?

Fed’s challenge: to spur inflation

Fed cuts interest rates by a half point, signaling end to its inflation fight

Inflation’s down for the third straight month. But is that enough for the Fed to cut interest rates?

How often does the Fed actually achieve its dual mandate — price stability and maximum employment?