Listen to the full episode, here.
Key Points
- The Federal Reserve’s rate cut only directly impacted the overnight lending rate between banks, not long-term rates like mortgages, which are influenced by broader economic expectations.
- Mortgage rates could even rise after a Fed cut if the market expects stronger growth and inflation ahead.
- The decision to cut rates was presented as a preemptive “balancing act” by the Fed, aimed at staying ahead of a slowing economy characterized by a weakening labor market and modest GDP growth.
- The rate cut had a direct effect on consumer financial products tied to the prime rate—such as home equity lines of credit (HELOCs)—leading to immediate, though modest, savings for borrowers; conversely, it meant lower interest earnings for savers with money in deposit accounts.
- The primary mechanism for stimulating the economy was steepening the yield curve, which improves bank lending profitability and encourages new money creation through loans.
- The rate cut was argued to benefit smaller companies more than large corporations; smaller firms rely more on floating-rate bank loans, while large issuers already locked in long-term, low-cost bond financing.
John Norris (00:30):
Well, hello again, everybody. This is John Norris at Trading Perspectives. As always, we have my good friend, Sam Clement. Sam, say hello.
Sam Clement (00:36):
Hi, John. How are you doing?
John Norris (00:36):
Sam, I’m doing very well—thank you for asking. I hope you’re doing well, too.
Sam Clement (00:39):
I cannot complain.
John Norris (00:40):
I’m glad to hear it. Now, Sam, as you already know—and as undoubtedly everyone who listens to an economics podcast already knows—the Federal Reserve, at its meeting on September 16 and 17, announced on the 17th at 1:00 p.m. Central Daylight Time that it cut the target overnight lending rate by one quarter of one percentage point—25 basis points.
Sam Clement (01:04):
That’s exciting.
John Norris (01:05):
Isn’t that exciting stuff? I bring it up because, often—and I’m sure you get these questions, too—people hear, “The Fed’s going to cut rates,” and they immediately think mortgage rates are going to fall through the floor, the yield to maturity on the 10-year is going to drop, the yield to maturity on the 30-year bond will drop—all these rates will fall. However, the Fed doesn’t control that stuff.
[crosstalk] (01:30)
John Norris (01:31):
It controls, effectively, two rates: the overnight lending target and the discount rate. The discount rate really doesn’t impact consumers; it’s what banks can borrow at from the Federal Reserve. The overnight lending target rate—technically, the target overnight lending rate—is where banks lend to each other overnight. That’s it. That’s what the Fed controls; it doesn’t control the other stuff.
Sam Clement (01:57):
I’ve described it to people this way: the further you go out on the curve each day, the less control the Fed has. An overnight rate? Very direct. A one-week bill or a four-week bill when it’s issued will be around where Fed funds is. Three months—still close. At two years, people say it largely reflects where Fed funds will average over that period. But each step further out, it becomes less and less tied to what the Fed is doing.
John Norris (02:27):
And, interestingly enough, sometimes when the Fed cuts the overnight lending rate, longer-term rates go up.
Sam Clement (02:34):
Right—and that’s what confuses people. We talk about rates “going down,” they hear “rate cuts,” and yet long rates go up.
John Norris (02:42):
They hear that rates are going down—rate cuts and all that—and yet long rates rise.
Sam Clement (02:46):
It’s the single most confusing part. You hear mortgage lenders and real estate agents talk about it. Bankers can’t wait for the Fed to start cutting rates. A mortgage lender will say, “Finally—they’re cutting rates. This is what we’ve been asking for.” And then mortgage rates actually go up in that time.
John Norris (03:04):
So they don’t do anything, and people are confused: “I thought the Fed cut rates.” Well, the Fed cuts two rates, and really only one of them is the one people talk about: the overnight target rate between Fed-member banks. That’s what a Fed rate cut is.
Now, Sam, we’ve been waiting for this for a long period. We’ve been—what—a year waiting for this rate cut? The Fed cut the overnight rate a couple of times last year and then went on pause. It seems like, since January, we’ve been waiting for the Fed to cut again, but it’s taken forever. Why is that?
Sam Clement (03:43):
To answer that—maybe in a long-winded way—we’ve said for quite some time that the Federal Reserve had reasons to cut. And you could argue there were reasons not to cut, too. What the Fed has been waiting on is that inflation hasn’t really come back to the 2% target… but it’s not going back up significantly either. The labor market is weakening a bit. That’s the balancing act they’re in—and you’ll hear every Fed member talk about it. You really need to start cutting before things roll over. It’s a balancing act.
John Norris (04:32):
You want to stay ahead of the proverbial curve.
Sam Clement (04:33):
Right. If you’re docking a boat or landing a plane, you start cutting the power before you hit the dock or the runway.
John Norris (04:41):
Oh shoot—that’s what happened.
Sam Clement (04:42):
Yeah. So that’s the balancing act. But you don’t really know what it’s going to be—it’s not like a boat where it’s the same every time. How much are things weakening? Will inflation pick back up? A lot of unknowns. That’s why economics is called a social science.
John Norris (05:01):
As opposed to an exact science. As most listeners know, the Fed has a dual mandate: price stability and full employment. Right now, CPI—the trailing 12-month Consumer Price Index—is about 2.9%.
Sam Clement (05:15):
Around there.
John Norris (05:15):
Yes—2.9%. PCE is about 2.7%—the Personal Consumption Expenditures Price Index. And the official unemployment rate is 4.3%. But only about 63.3% of Americans are looking for work. When I look at those things, I think: the labor market isn’t exactly feverishly hot. As a matter of fact, a couple of weeks ago the Bureau of Labor Statistics said, essentially, “We goofed a little bit.” Maybe they wouldn’t say “goofed,” but they reported all these jobs—and 911,000 of them didn’t exist.
(05:51):
That was from April 2024 through March 2025. So, labor markets might not be as red hot. Inflation isn’t at 2%, but it got as high as—officially—9.1% back in (I think) April 2022. It’s down and has been hovering around the 3% range for a bit, and there’s nothing out there to suggest it’s going to skyrocket permanently. People are watching tariffs and all that, but that’s been there.
Looking at the most recent GDP reports from the BEA—lots of acronyms today, Sam—first-quarter GDP was 1.5%, and second quarter was 1.6%.
(06:46):
Taking all of it together, I still maintain what we were saying at the beginning of the year: the Fed had ample room to be aggressive in cutting the overnight rate, should it so desire. I felt that way in the first two quarters and still do. Now they’ve already made one rate cut. And according to Fed funds futures—as of today, September 24, 2025—markets see another 25-basis-point cut at the next meeting and probably at the December meeting as well. Anything can change between now and then.
So here we are: the overnight rate has been cut from 4.5% down to 4.25%. We see a weakening labor market, inflation a bit higher than we’d like but nowhere near a couple of years ago, and an economy that’s growing but not red-hot. With the Fed cutting again, Sam, what does this mean for mortgage rates? That’s what everyone wants to know.
Sam Clement (07:57):
It’s unknown what it means for mortgage rates. We should clarify what I said earlier: the farther out on the curve you go, the less impact the Fed funds rate has—and mortgages aren’t even on that curve directly. They’re really a derivative of the 10-year—some combination of the 10 and 30, people say. Ten-plus years out on the Treasury curve isn’t tied to Fed funds.
You mentioned last time we had that almost panicky 50-basis-point cut; mortgage lenders and real estate agents said it would be great for housing—and mortgage rates went up. These are not tightly linked, especially in the short run. Longer-term inflation expectations and GDP growth expectations will be the overall drivers of where mortgage rates go.
John Norris (09:05):
If this seems confusing, it’s because people hear “Fed cut rates” and expect mortgages to fall. But the Fed cuts the overnight cost of money. How long do people live in a house before selling? Ten years, maybe?
Sam Clement (09:29):
Sure—and the note is often 30 years.
John Norris (09:30):
Right—typical note is 30 years. So why would a 15- or 30-year mortgage be priced off the overnight cost of money? Of course it’s going to be priced off something like the 10-year note if the average life of a mortgage is nine to ten years.
You mentioned that when the Fed cut 50 basis points last year, mortgage rates actually went up. If the cost of money between banks is lower, that can create more money in the system, expectations for inflation can creep up—and long rates can rise. Unfortunately for those selling mortgages—and probably for many homeowners—it may be a long time before we see 15- and 30-year conforming rates back at 2020–2021 levels, if ever again in my career.
Sam Clement (10:43):
I hesitate to say “never” in this industry—as you should—but it’s hard to envision, given the unique circumstances that pushed rates that low.
John Norris (10:48):
Quantitative anything—financial repression, asset purchases—all that.
Sam Clement (10:59):
Right. Just crazy, crazy low levels.
John Norris (11:17):
Mortgages are important to consumers, but there are other rates that are more directly tied to the Fed. The housing market’s been frozen for so long—nobody wants to sell and buying is tough.
Sam Clement (11:17):
You and I are part of the problem. I wouldn’t mind selling my house, but I’d have to really downsize for my note to stay the same.
John Norris (11:26):
That’s not a unique problem right now. But when you flip to consumer loans, that’s where rates are directly tied to Fed funds. Home equity lines of credit—any rate tied to prime—goes down when the Fed cuts, if it’s floating. Credit card rates largely as well, though the timing can vary.
Sam Clement (11:55):
Right.
John Norris (12:00):
A majority of floating-rate loans in the U.S. are priced off either the prime lending rate or SOFR (it would’ve been LIBOR not too long ago). Prime has, for about 30 years, hovered at 300 basis points above the overnight target.
Sam Clement (12:25):
I’ve almost assumed that’s what it has to be—I know it’s not fixed, but it’s been consistent.
John Norris (12:29):
The so-called “Wall Street Prime” is an amalgam of the prime lending rates at the largest banks; The Wall Street Journal publishes it. Essentially, it’s the money-center banks’ prime rate for their best customers—and it’s been 300 bps over the overnight target. So when the Fed cut the overnight rate from 4.5% to 4.25%, prime went from 7.5% to 7.25%.
Sam Clement (13:11):
Overnight.
John Norris (13:13):
The next day—it’s printed in the Journal at 7.25%. So if you had a HELOC at 7.5% and a $100,000 balance, the next day it’s 7.25%. Voilà—thank you very little—you just saved about $250 a year. That’s much better than a sharp stick in the eye. Most things are better than a sharp stick in the eye. That’s about $21 a month—not sending you to the biggest house on the hill, but better than nothing. And when you multiply that by all the borrowers across the economy, it adds up.
Sam Clement (13:57):
You’re spot on. Flip side: deposits. That’s where prime being +300 originates—banks aren’t eager to pay high interest. Deposit rates are coming down too.
John Norris (14:22):
You’re saying banks don’t want to “eat” this.
Sam Clement (14:24):
Right. Deposit rates will come down, maybe not literally overnight—CDs and such are different—but broadly lower. Who’s earning that interest, and how does it impact them? We’ve talked about the “K-shape” economy—the haves and have-nots.
John Norris (14:50):
We’ve understood that “K.”
Sam Clement (14:51):
It’s been a theme since COVID. Those earning meaningful interest on cash have effectively had a surge in income. Now they earn less.
John Norris (15:14):
They’ll earn a little less. For that type of consumer, the reduction probably won’t change behavior much—after one 25-bp cut. Agreed?
Sam Clement (15:14):
Agreed—probably not.
John Norris (15:14):
However, two more cuts this year, two more next year—suddenly my HELOC is $1,000 a year cheaper. That’s meaningful. If you’re saving $80 a month, that matters to many people.
And on the flip side, if banks pay less on deposits, those sitting in a 4% money-market at the bank—happy enough with that absolute return—might see it drop to 3% or less. They may feel the need to do something more creative with that money than just keep it in the bank—go invest it, put it to work. That’s how the Fed stimulates activity by cutting their rate.
Sam Clement (16:36):
One more consumer piece: credit cards. Those rates should come down with Fed cuts, but you’re going from, say, 24% to 23.75% for people paying interest—not exactly life-changing.
John Norris (17:10):
A quarter-point doesn’t do darn much.
Sam Clement (17:11):
Right. People cite the big national credit-card debt numbers—and those numbers are almost always rising.
The high-end consumers—
John Norris (17:20):
What do you think Dave Ramsey thinks about that?
Sam Clement (17:23):
I’m sure he doesn’t like it—he doesn’t like debt.
John Norris (17:23):
At all.
Sam Clement (17:23):
So I pause there: the Fed’s mechanism for softening a slowdown isn’t primarily lowering credit-card APRs—or even HELOC rates. That’s not the lever they’re counting on.
John Norris (17:49):
What they are trying to do is get money into the economy—through increased spending and investing, or good old-fashioned borrowing and lending. Typically—though not always—when the Fed starts cutting the overnight rate, deposit rates fall more rapidly than loan rates. That steepens the yield curve. The steeper the curve, the greater the spread a bank earns between deposits and loans. Historically, that larger spread induces banks to make more loans. And when they make loans, they create money “out of thin air”: the borrower gets access to deposits, and the depositor retains access to theirs—so new money is effectively created. That’s how you stimulate the economy.
Sam Clement (18:46):
Right. If I deposit a dollar at the bank, the bank lends that dollar to you.
John Norris (18:54):
Thank you, Sam.
Sam Clement (18:55):
You’re welcome. I still have the dollar in my account; you now have a dollar you’ll deposit somewhere else. That creates multiples of each dollar in the system. That’s what people mean by “money printers on.” We’re not physically printing more bills; it’s the banking system at work.
John Norris (19:20):
Exactly. It’s how it’s designed—it’s not a glitch.
Sam Clement (19:22):
When banks aren’t lending—when cash just sits because there’s no spread—money isn’t being created, and activity slows.
John Norris (19:25–19:54):
That’s the root of everything the Fed does—whether it’s the overnight rate or required reserves. They can lower reserve requirements so banks can lend more—more money is created—or tighten them so banks hold more cash. Most of their tools revolve around this.
John Norris (19:54):
Alright, we talked about mortgages, consumers, and the banking system—more than I thought we would. What could this rate cut—and future cuts—mean for corporate America?
Sam Clement (20:07):
It may be different this time. Large-cap companies did a fantastic job terming out debt at ultra-low rates. The rise from basically 0% to 5% for Fed funds didn’t have the historical bite for many of them. Small companies, though, love lower rates—and banks being more willing to lend. “Small” could mean small-cap, or true mom-and-pop. Any firm needing bank lending for day-to-day operations benefits when banks loosen up. Big names—Amazons, Apples—saw issuance at 2% for 40 years in some cases. (Not getting into specific deals here.)
John Norris (21:22):
They should’ve borrowed for longer—throw a bunch of 100-year paper out there. Larger companies can access the corporate bond market and did term out a lot of debt—also with their banks. But many smaller companies—privately held or even in the Russell 2000—are more reliant on bank funding for capital needs. If they maintain floating-rate bank debt, a 25-bp cut tied to prime or SOFR reduces their interest expense by 25 bps.
(22:14):
That drop can flow straight to the bottom line—unless something else changes in SG&A or COGS. The smaller the company and the more reliant it is on bank debt, the greater the income-statement impact from a Fed cut. That may sound nerdy—but it’s an economics podcast.
Sam Clement (22:39):
Makes sense to me.
John Norris (22:40):
So, super-small-cap and small-cap companies might benefit more from rate cuts—this one and any upcoming ones—than large-cap companies. That’s always good: when the CFO’s office is happy with profits, everyone breathes a little easier. I can’t predict bonuses, but generally, rising profitability makes investors happy.
Let’s keep our fingers crossed that a few rate cuts help at least a segment of corporate America increase profitability—because, Sam, without going down a rabbit hole, stock-market valuations are a bit stretched. Hopefully this helps.
John Norris (23:06):
I guess to wrap it up: the Fed has specific reasons to cut rates. There are also flow-through effects that can help different groups. Even in cases where it doesn’t help much, it’s not really hurting. Across the board, there are intended effects and second-order effects—and hopefully most people benefit somehow.
John Norris (23:31):
Alright, Sam—now that we’ve talked about what a Fed rate cut is and isn’t, why we’ve been waiting for one, what it might mean for mortgages, consumers, and corporate America—anything we didn’t cover?
Sam Clement (23:44):
I think that’s about it.
John Norris (23:45):
I think that’s about it, too. We always love to hear from you. If you have any comments or questions, please let us know. You can drop us a line at , or leave us a review on the podcast outlet of your choice.
As always, if you’re interested in reading or hearing more, go to oakworth.com—O-A-K-W-O-R-T-H dot com. Under the Thought Leadership tab you’ll find access to all kinds of information, including links to previous Trading Perspectives podcasts, our weekly newsletter/blog Common Cents, our quarterly magazine and accompanying analysis Macro & Market Perspectives, as well as good pieces from our Advisory Services group headed by Mac Frazer.
Alright, Sam—anything else to say on this exciting topic?
Sam Clement (23:59):
That’s all I’ve got.
John Norris (24:01):
That’s all I’ve got today, too. Y’all take care.
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