When was the last time the Fed cut interest rates? A. 1994 See the answer below! |
Last week, the Federal Reserve cut interest rates by 50-basis points. But why, what does it mean for you, and… what’s next? Read on to find out. Why? The Fed decided to lower interest rates to fulfill its responsibility of maintaining a healthy economy. When interest rates are too high, it can make borrowing money more expensive for businesses and consumers, which can slow down the economy. By lowering interest rates, the Fed hopes to encourage spending and investing, boosting economic growth. What does this mean? On a real basis, policy still appears to be quite restrictive in historical context (see chart of the week below). As important as the rate cut itself was, more important was the outlook for policy going forward as well as the commentary from Feb Chairman Jerome Powell. Should we expect more rate cuts? Markets seem to be expecting an additional 50-basis points reduction this year and (potentially) an additional 100-basis points reduction next year. But more important was an update to economic projections, which showed a small deterioration in the economic outlook from Fed officials in terms of unemployment and economic growth. Additionally, the long-term projection for the Fed Funds rate of 2.875% was slightly higher than market participants may have been expecting. The higher-than-expected long-term rate may have also been the reason long-term yields moved higher after the announcement. How does this benefit you?
What does this mean for you personally? The answer is… it depends. If you’re looking to borrow money, this is a great time to do it. If you’re saving, you might want to consider other options that could give you a higher return. What’s next? Beyond the cut itself, Mr. Powell also made very clear the role that… wait for it… data will play on future policy actions. Particularly in relation to the labor markets, which proved to be a focal area for policy makers for the rate cut given the slowdown in job creation that has taken place in the last few months. Looking forward, labor market conditions will assume the pole position in terms of Federal Reserve attention while still keeping a watchful eye on inflation. With expected downward pressure on crude oil prices into the end of the year, lower energy prices should help keep headline inflation at bay. We’ll get the next “post-cut” check in on inflation on Friday. With attention moving from inflation towards the labor markets, any surprise uptick in inflation from here forward may have a significant impact on markets given the policy easing cycle that appears to be priced into markets over the next 18 months. What Happened
Chart of the Week Despite Cut, Policy Still Restrictive? |
 |
Trivia Answer |
