The Federal Reserve Chairman’s announcement of a half percentage point rate cut in the Federal Funds Rate (or colloquially, interest rates) last week had been eagerly anticipated in the face of increasing signs of a slowing economy, and it was viewed as a substantial first step toward stimulating renewed economic activity.
With inflation under control (and I use that term loosely as prices on many key items remain above optimal levels), the Fed is looking to reignite economic activity and stave off a potential recession. Ironically that was the same rationale that underpinned the rise in interest rates in late 2022 and early 2023, albeit for entirely different reasons.
Additional cuts are expected at the Fed’s next meeting right after the election, but it remains to be seen how quickly additional reductions may follow and, ultimately, where will interest rates settle until the next time the Fed decides that intervention is necessary.
On the plus side, lower interest rates could serve to stimulate home buying activity, potentially in two helpful ways. For younger consumers who have found it difficult to get mortgages or who have abstained in the face of elevated interest rates, the Fed’s reduction could make it easier for them to find homes.
Secondarily, it could lower one of the obstacles that has also stifled first-time buyers: a lack of affordable inventory. In the face of elevated interest rates, even those homeowners considering relocation have been reluctant to trade their existing low-rate mortgage for one at today’s higher rates. With that obstacle lowered, if not removed, we could see available inventories rise and spark increased home buying activity.
Anything that can spur new household formation or encourage home buying should be good news for the furniture business. The same is true for any development that improves access to credit, a factor that has proven critical to furniture sales during the post-pandemic doldrums.
It is important to note, however, that whatever happened last week and whatever happens at the next meeting of the Fed is not going to be felt immediately or even this year. The combination of election season, stubbornly high prices in key commodities and a consumer confidence level that has remained stuck in the same cautious and concerned spot for the past two years likely means that big-ticket spending will remain soft in the near term.
In announcing the August Consumer Confidence numbers, Dana Peterson, chief economist at The Conference Board, pointed out that “consumers continued to express mixed feelings in August. Compared with July, they were more positive about business conditions, both current and future, but also more concerned about the labor market. Consumers’ assessments of the current labor situation, while still positive, continued to weaken, and assessments of the labor market going forward were more pessimistic. This likely reflects the recent increase in unemployment. Consumers were also a bit less positive about future income.”
These concerns were felt most strongly among lower-income consumers, something that’s not a surprise to anyone in the furniture industry who has seen the promotional segment stung by soft demand over the past 18 to 24 months.
While the recent announcement is good news and may be the first step in a turnaround, there remain a few more dominoes to fall before we start popping the champagne corks.
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