Why It Might Be Time to Cut Interest Rates

After 11 rate increases by the Federal Reserve starting in March 2022, the federal funds rate has been at a more than 2 decade high for the past 11 months. However, after several months of stagnating, inflation, as measured by the Consumer Price Index, appears to be easing once again, dropping just barely below 3% for the first time since early 2021. At the same time, the labor market has begun to cool, leading to growing calls for the Fed to cut rates before the economy slows down too much.

The federal funds rate, the interest rate that the Fed directly targets, is the rate that banks pay for overnight loans to other banks. While this rate is not directly pertinent to most consumers, changes in the federal funds rate trickles down to other consumer rates such as auto loans, credit cards, and mortgages. These other rates are also at or around multi-decade highs, making the cost of borrowing money more expensive for everyone. We surveyed 2,200 U.S. adults on the current state of interest rates to better understand how elevated interest rates are affecting the average consumer.

When asked their opinion on the current level of interest rates, 68% of respondents said rates are too high: in fact, a greater share of respondents (41%) believe rates are “much too high” rather than “somewhat too high” (27%). On the other hand, only 3% of U.S. adults characterize current interest rates as too low. 

Among respondents who believe interest rates are too high, 74% said that high interest rates have affected their household finances. Baby boomers were relatively less affected than adults overall, but still a majority (61%) of this group reported being impacted by interest rates. On the other hand, younger generations were most likely to say high rates affected their personal finances, with GenZers at 85% followed by millennials at 80%. GenZers and millennials are more likely to hold student debt, perhaps those with newer loans or loans with variable rates are particularly feeling the crunch of higher rates. In addition, millennials are entering their prime earning years and many of them are parents with young children, making them likely to consider taking out a mortgage or an auto loan as well as having higher expenses overall.

Among those who thought interest rates were too high, 75% said they cut back on non essential spending. This makes sense as discretionary spending is usually first to be reduced when budgets get tight and it aligns with other Morning Consult data: spending declines this year were largest for discretionary services including restaurants, hotels, and other recreational purchases. 

But consumers reported even changing their behavior for essential purchases – 63% said they reduced their spending on essentials due to high interest rates. While it is more challenging to cut back on essentials, consumers can employ cost saving measures like trading down to cheaper alternatives. In 2024, Morning Consult’s substitution index has been creeping up for many goods and services suggesting more trading down behavior from consumers.

More than half (54%) of respondents have prioritized paying down debt. With higher interest rates, debt becomes more expensive, so paying down loans faster could save debt saddled consumers money in the long term. However, paying down debt faster likely comes with the trade off of spending less money today. While a smaller share of respondents said they put off buying a car (40%) or a house (33%), these purchases are made less frequently so a smaller share of adults likely considered making these large purchases in the first place. Taking into account that this question is only applicable to a smaller subset of consumers, the share who said interest rates caused them to put off financing a house or car looks more substantial. 

Despite high interest rates, a surge in inflation and an ever changing labor environment, consumer spending has fueled the U.S. economy, at least so far. However, there are now multiple signals pointing to interest rates becoming prohibitively restrictive: consumers reporting pullbacks due to higher rates, a loosening labor market, muted GDP, among other signals, all while inflation has cooled nearly all the way to the Fed’s target level. In other words: it’s time to cut rates.

Despite the Fed signaling one or more cuts in interest rates by the end of the year and market participants baking in a over 95% probability of a 25 basis point decrease at the Fed’s September meeting, more U.S. adults believe that interest rates will be higher at this point next year (34%) than lower (25%). Belief that rates will be higher next year could be dampening consumers’ future expectations for the economy, an input into the Index of Consumer Sentiment, which has been notably muted below pre-pandemic averages despite a relatively strong U.S. economy. 

Breaking it down into demographics, few groups have a greater share of respondents that think rates will be lower next year than higher – notable exceptions are boomers (+6 percentage point net difference) and higher income adults (+14 pp). High-income and older adults could be more likely to keep up with business and financial news, which regularly reports on the Fed’s moves. Although the Fed has expressed interest in increasing accessibility of its news to a broader audience, the results above show that the Fed’s messages are not reaching the general public enough. 

Although most respondents don't seem to follow Fed news closely enough to have absorbed the  consensus view that rate cuts are imminent, a majority of respondents said that the Federal Reserve controls interest rates (62%), a much higher share than any of the other options. The second highest was at 13% for U.S. banks, which is true to an extent as well because banks do set rates for their own loans, albeit influenced by the fed funds rate. Few respondents believed that the president (7%), the political party in power (7%), or congress (9%) control interest rates.

When asked about a variety of reasons interest rates may be high, the most popular choice was bringing inflation down at (67%), followed closely by economic growth (64%) and partisan politics (60%). 60% is a large share for partisan politics considering very few respondents believe the president, congress, or the political party controls interest rates, implying that a large share of respondents could believe that politics is coloring the Fed’s decision making. Political party affiliation also plays a role: registered Republicans are more likely to say partisan politics is a key reason for high rates at 67%, 10 percentage points higher than registered Democrats. The Fed regularly emphasizes that its decision making is apolitical, but clearly the average American is skeptical of that claim. 

Most consumers have noticed the effects of high interest rates and changed their behavior accordingly

The Fed raises interest rates to slow down demand, which then cools down the economy allowing inflation to ease. While strength in consumer spending outpaced expectations last year, after nearly a year of holding steady on rates, it appears the Fed has become at least somewhat successful in dampening demand: most consumers have noticed rates are high, and those that have noticed, have cut back, particularly for nonessential spending. Most respondents polled know the Fed controls interest rate policy but also in addition to bringing inflation down, believe partisan politics plays a role in why interest rates are high today. In addition, most consumers are not aware of (or alternatively don’t believe) recent Fed communication signaling rate cuts later this year. While this is likely not welcome news to the communications efforts of the Fed, reduced rates will likely be a happy surprise to many consumers later this year and could provide a boost to spending if high rates have truly been holding them back from a variety of different economic activities.