Federal Reserve's shifting stance offers 'breadcrumbs of hope' for Long Island businesses

Federal Reserve officials said Wednesday that the U.S. economy is moving closer to the point at which they would reduce a key interest rate, boosting optimism among Long Island business leaders. 

The Fed opted Wednesday to hold its key interest rate at a 23-year high of about 5.3% but Fed Chair Jerome Powell said recent inflation reports "have added to our confidence" that it could lower the key rate at its next meeting in September.

"We have made no decisions about future meetings and that includes the September meeting," Powell said Wednesday during a press conference. "The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate."

The Fed’s actions are closely watched because a drop in its benchmark rate makes it cheaper for consumers to borrow money through credit cards, auto loans and student loans. While mortgage rates aren’t directly tied to the Fed’s benchmark rate, they tend to move lower when inflation is easing.

Slight shifts in the language Fed officials used to describe the economy provided hints at its next move. The Fed has a dual mandate from Congress to maximize employment and keep prices stable.

When inflation was accelerating, the Fed prioritized bringing down the pace of price increases. But in its policy statement on Wednesday, the Fed added language that it is attentive "to the risks to both sides of its dual mandate," including its focus on employment. 

Of course, an uptick in inflation reports released in August could lead the Fed to hold rates higher for longer.

The shift in the Fed’s stance is reason for optimism that Long Island businesses will be able to borrow money at cheaper rates, said Matt Cohen, president and CEO of the Long Island Association, which represents the region’s business community.

"The fact they are even changing their language slightly, it’s breadcrumbs of hope," Cohen said. "New York State is an expensive place to do business. When there’s an opportunity to bring down the cost of doing business, that resonates in New York state and Long Island perhaps greater than in some other places."

Lower rates are particularly important for companies in emerging industries such as offshore wind, which have cited higher interest rates as a barrier to development, Cohen said. 

A potential rate cut would benefit commercial and residential construction, said Mike Florio, CEO of the Long Island Builders Institute in Islandia. With elevated interest rates this year, it has been hard to justify new construction projects but there’s hope that could improve next year, he said.

"Builders have faced a very challenging environment to get financing for projects," Florio said. “ . . . Additionally, I think it will help the residential home improvement market. People have been reluctant to dip into their home equity because the rates have been so high."

If the Fed does lower interest rates, Long Island businesses could be more likely to invest in expansion, boosting the economy, said Steven Kent, an economics professor at Molloy University in Rockville Centre.

But Kent believes milder inflation could have a more profound effect.

"Lowering interest rates modestly is definitely a positive," Kent said. "But I do think getting a year or two of stable prices probably would be healthier for the Long Island economy."

Zahra Jafri, president of Lynx Mortgage Bank in Westbury, said Powell’s comments on Wednesday did little to change her expectations because he stressed that the Fed’s next move will depend on economic data released over the next few weeks. But a September rate cut would be a positive outcome for homebuyers, she said, and could convince more homeowners to list their properties, adding needed supply to the market.

"From a mortgage perspective, any relief we can get is needed," she said. "With rates high, it is impacting affordability for consumers."

Consumers shouldn’t get too excited about the prospect of slightly lower borrowing rates, Greg McBride, chief financial analyst at Bankrate, wrote in commentary published on Wednesday.

"Borrowers should not look at a coming interest rate cut as a panacea," he wrote. "Interest rates took the elevator going up, but they’re going to take the stairs coming down. High-cost credit card debt and home equity lines of credit will continue to be high-cost debt for some time." 

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.