ICIS Economic Summary: US eyes coming interest rate cuts as consumer spending, inflation eases (2024)

FAQs

How will a cut in interest rates influence consumer spending? ›

When interest rates go up, consumers may be more attracted to saving dollars that can earn higher interest rates rather than spend. When rates go down, people may no longer wish to save, but instead spend and invest, even taking out loans to consume at low interest rates.

When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

Consumer spending is by far the biggest driver of the economy. For example, according to the U.S. Bureau of Economic Analysis, in 2024's first quarter, personal consumption expenditures represented nearly 68% of the nation's Gross Domestic Product, or GDP, ³ the primary measure of the size of the U.S. economy.

The first effect of an interest-rate increase is to increase the amount of future consumption that is gained by forgoing a dollar of consumption today. By making today's consumption more costly relative to tomorrow's consumption, the interest-rate increase encourages people to consume less today and save more.

Decreasing the policy interest rate can stimulate economic activity and cause inflation to rise. Lower interest rates encourage people to spend more and save less. Lower rates reduce the amount needed to pay off debt and that means more people will borrow money for major purchases like a new vehicle.

In other words, the market's anticipation that the Fed would lower rates had a positive effect stock prices, since it assumes that a company's earnings per share and profits will rise as borrowing costs decline. In effect, lower interest rates lead to higher price-to-earnings metrics and vice versa.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

When yields or interest rates are low, it typically benefits borrowers more than lender...

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

While there's still some debate, no, the US economy isn't in a recession. Although inflation persists and interest rates continue to rise, there's widespread agreement that the overall conditions consistent with a recession have not been met.

What has the biggest effect on consumer spending? ›

Overall during economic recessions consumers tend to dine out at cheaper places, purchase less durable goods and go on less vacations.

In economics, stagflation (or recession-inflation) is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high.

In general, higher interest rates discourage consumption and encourage saving. Lower interest rates encourage consumption and discourage saving because there is less point in saving money. When interest rates decrease, it becomes cheaper for individuals to borrow money, which can encourage them to consume more.

More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services.

Interest rates have a direct effect on consumer behavior, impacting several facets of everyday life. When rates go down, borrowing becomes cheaper, making large purchases on credit more affordable, such as home mortgages, auto loans, and credit card expenses.

Lower interest rates decrease the cost of borrowing money, which encourages consumers to increase spending on goods and services and businesses to invest in new equipment.

An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production.

This will cool the economy, reduce inflation expectations and bring inflation down. If inflation is too low, we can lower interest rates and make credit cheaper to boost investment and spending, which raises inflation. In recent years, inflation was too high. Prices increased a lot, especially for energy and food.