The Federal Reserve is expected to cut interest rates. What would this mean for you?

NPR’s Ayesha Rascoe talks to University of Michigan economist Justin Wolfers about the Federal Reserve meeting this week and what the expected interest rate cut could mean for the economy.

AYESHA RASCOE, HOST:

Some relief for borrowers could be just around the corner. The Federal Reserve is expected to cut interest rates at a key meeting later this week. The decision follows calls by President Trump for the Fed to take far more aggressive action on cutting rates. Joining us now to discuss all this is Justin Wolfers. He’s a professor of public policy and economics at the University of Michigan. Welcome to the show.

JUSTIN WOLFERS: Hey. Happy to talk economics.

RASCOE: So let’s start with the expected rate cut. Why do you think it’s happening now?

WOLFERS: Yes, it’s important to understand that the direction in which you move should depend on where you stand and where you want to get to. So the thing is, right now where we stand is, it’s as if the Fed has its foot lightly on the brakes of the economy. And it thinks that’s probably not right. Now might be a good moment to coast into neutral, so it’s cutting interest rates but just a little bit.

RASCOE: And how big of an impact could that have on the economy?

WOLFERS: So we economists fight here and there about a quarter of a percentage point versus a half, and these are vicious debates, and we bring all the ammo and data we have to bear. And the truth is, the most important thing is that we get the settings roundabout right. My guess is, whichever side of this one you’re on, we’re going to end up roundabout in the right place.

RASCOE: And what does that mean? Like, does that mean that people are going to be – have a easier time buying houses? Will inflation be capped? Like (laughter), what does that mean for the regular person?

WOLFERS: I love it. You’re, like, hey, man, you’re a teacher. First of all, we’re talking about a quarter of a percentage point. Normally, that’s so small that it doesn’t make a huge difference. Secondly, it does make a difference. And the other thing is, when we’re talking about an economy this big, a small fraction of a huge thing can still be a big deal. So what it’s going to mean is that interest rates on home loans are going to come down. If you have a fixed-rate mortgage, it’s not going to help you, but if you have an adjustable rate one, it will. We’ll see a bigger effect on things like car loans, and life will get a little easier for those who are in debt.

Now, on the flip side, if you’re someone who’s got their money in the bank and you’re living off interest, life will get a little bit harder, as well. Now, the way all of this adds up is lower interest rates means there’s less of an incentive to save for the future. There’s more of an incentive for businesses to borrow money and invest in the next big project, and so it may spur the economy. The economy’s been slowing a little, so that’s a good move. Now, of course, the hotter we run the economy, the more likely we get a little bit of inflation.

RASCOE: OK, so – but the Trump administration has been piling on the pressure for the Fed because President Trump wants big rate cuts. You know, the administration has been trying to get Fed Governor Lisa Cook fired over what it says is mortgage fraud. That’s a matter that’s currently before the courts. But are you worried that the independence of the Fed is now under threat?

WOLFERS: Yes, I’m very worried. So one thing that I think’s really important here is, yes, the Fed is cutting rates, but, no, Trump is not getting what he wants. What Trump wants is an utterly dramatic rate cut. He said he wants interest rates at 1%, which is the sort of thing you would do if the economy were in free fall. Instead, the Fed’s likely to cut rates by a quarter or a half a percentage point. We’re going to move from a foot lightly on the brake to being in neutral.

Trump wants them to jam the foot on the accelerator right away. He wants to stack the Federal Reserve Board with its people rather than independent economists who would act in the best interests of the American people. This is exactly what President Erdogan did in Turkey. He appointed a loyalist to the central bank. He directed those loyalists to push ahead with low interest rates, even as inflation took off. They persisted, and very quickly, Turkey got to 86% inflation. You might say that couldn’t happen here, but the reason you might say it couldn’t happen here is because we have an independent Fed. If that comes under threat, then a lot of very bad outcomes become possible.

RASCOE: President Trump’s top economic policy – outside of, you know, talking about lower interest rates – is obviously tariffs. And one of the reasons he says he wants these tariffs is to create jobs at home, especially in the manufacturing sector. What are we seeing on that front?

WOLFERS: What we’re seeing is we saw manufacturing jobs decline last month. They declined the month before, and they’ve been declining all through the year. We’ve lost about 80,000 jobs in six months. That’s not unusual. American manufacturing has been in decline for decades. That might sound worrying until I remind you that what’s been happening is Americans have been climbing up the value chain. We’re no longer screwing the lid on toothpaste tubes. We’re scientists and engineers designing technologies of the future instead. The tariffs simply have not worked to bring manufacturing back.

RASCOE: Well, what will you be looking out for in the next few months when it comes to the economy?

WOLFERS: I’m worried about two bad things happening at the same time. I’m worried about those tariffs hitting and raising prices and boosting inflation. And I’m worried about those tariffs and also the tremendous economic uncertainty that we see right now continuing a step further. Our economy’s in a very delicate place. We’re one bad move away from a recession. That bad move might already be in the works. We might be lucky and we avoid that bad move, but we’re teetering awfully close to the edge. And the crazy thing about all of this, Ayesha, is it doesn’t have to be this way. This would be the first recession in my lifetime that was caused directly by the policy moves at the White House.

RASCOE: That’s Justin Wolfers of the University of Michigan. Thank you so much for joining us.

WOLFERS: Thanks, Ayesha.

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