Fed rate cut will boost Long Island economy, experts say

Long Island consumers and businesses will soon be able to borrow money at lower rates as the Federal Reserve kicked off the first in what is expected to be a series of cuts to its benchmark interest rate, dropping the key rate by half of a percentage point on Wednesday.

It was the first time the Fed has reduced its benchmark rate since 2020.

The decision brings the federal funds rate to approximately 4.8% from 5.3% — the highest the rate had been since 2001. The Fed had held the key rate at that level for the past 14 months.

The decision comes as the job market showed signs of slowing, with the U.S. unemployment rate rising but remaining low, at 4.2% in August.

"This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%," Fed chair Jerome Powell said at a news conference Wednesday.

Fed policymakers also signaled they expect to cut the benchmark rate by another half of a percentage point by the end of the year and by an additional full percentage point through the end of 2025.

Newsday spoke to local experts about how the Fed's decision will affect Long Islanders.

What does the Fed’s announcement mean for the Long Island economy? 

The decision is resoundingly positive for Long Island consumers and businesses who will be able to borrow money at cheaper rates, stimulating the economy, said John Rizzo, an economist and Stony Brook University professor.

"I’m very happy to see they were a little more aggressive in choosing the [half-point] decision," Rizzo said, noting the Fed could have decided to only cut its rate by a quarter-point. “... The Fed realizes they’ve got inflation under control ... but interest rates are high, so they have the opportunity to make a meaningful cut in interest rates that will stimulate further growth, jobs and wage growth without adversely affecting inflation."

The Fed's decision will yield lower interest rates on credit cards and auto loans for consumers as well as cheaper loans for businesses on Long Island, said Matt Cohen, president and CEO of the Long Island Association, which represents the region’s business community.

"It was a decisive action that indicates a very good day for Long Island and a very good day for the entire country," Cohen said. "Here on Long Island, the cost of living is suffocating us, and this allows us to come up for air a little bit."

What types of industries will benefit the most?

Businesses that rely on debt to finance purchases stand to gain from the move, including residential and commercial developers.

Cohen noted large-scale development projects are more likely to materialize as interest rates fall, including offshore wind projects.

Some multifamily developers who had paused projects because of the cost of borrowing funds could resume their plans, said Mike Florio, CEO of the Long Island Builders Institute in Islandia.

"It will go a long way to making projects viable that weren’t viable before because of the increased costs and higher interest rates," Florio said. "That should help to move more projects along the pipeline and build some more desperately needed housing here on Long Island."

What is the federal funds rate?

It's the rate set by the Fed, or more specifically the Federal Open Market Committee, at which commercial banks borrow and lend their excess reserves overnight. The Fed uses this key rate to achieve its policy goals, namely its dual mandate from Congress to pursue maximum employment and stable prices.

Why does it matter?

A lower rate can help spur hiring and investment but could lead to price increases. When interest rates are higher, it’s more expensive to borrow money to make purchases or investments, businesses hire less and inflationary pressures are diminished, according to the Federal Reserve Bank of St. Louis. 

How will this affect the LI housing market?

The Fed’s rate has the greatest effect on short term lending, and policymakers do not directly set mortgage rates. Mortgage rates have already fallen considerably in the past few months. The average 30-year fixed rate was 6.2% during the week ending Sept. 12, according to Freddie Mac. It had been nearly 7% in early July, and the recent drop could save borrowers hundreds of dollars on their monthly mortgage payment.

If the Fed engages in a series of rate cuts over the next year, mortgage rates should come down further, Rizzo said.

However, there's no guarantee the Fed won't change course as more data becomes available, and homebuyers should be careful about waiting for the perfect rate, said Quentin Hardy, a mortgage banker at the Melville office of Newrez, a lender and loan servicer. 

Even though homebuyers can get a mortgage at a lower rate this year, many are paying significantly more for homes, Hardy said. The median home price in Nassau County rose $85,000 to $835,000 in August compared with a year ago. As rates fall, borrowers’ buying power increases.

"I’m telling my customers don’t wait for the better rate to buy the house," he said.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.