How The Federal Reserve’s New Rate Cuts Could Affect You
On July 31st, Federal Reserve Board Chairman Jerome Powell announced that The Federal Reserve would be initiating their first interest rate cut since The Great Recession. This is widely seen as a preemptive action intended to circumvent a possible economic slowdown in the near future and extend the current record-long expansion. Chairman Powell himself asserted that the outlook for the economy still looks positive, nonetheless, the markets took a dive not long after the announcement.
Depending on your current financial circumstances, this cut could prompt a number of different reactions. In this article, we’ll take a deeper look at how The Federal Reserve’s new rate cuts could affect you or your business, and how to make the best of it.
Why did this happen?
The Federal Reserve’s official dual mandate from Congress is to, “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. Notice that this says nothing regarding the stimulation of economic growth, and Chairman Powell himself has reiterated that fact. Regardless, we are living in a global economy with countless interconnected financial levers and this recent move will likely have an effect on all three of those items (namely stable prices and inflation). In recent history, The Fed has been given a long leash on their official mandate and a large toolbox to work with in order to keep the economy chugging along at an earnest clip. He is well aware that by cutting rates now, it might give him one less tool to utilize if the country begins to slide into a recession, but to maintain the current prosperity, he might need to add a bit of coal to the fire.
If You are Looking to Borrow
Good news! If you are currently looking to secure a loan for a new car, business, or mortgage, now is a very good time to do it. The current federal funds rate just dropped to 2.38%, and most other rates hover near this rate or are tethered to it directly. To give you some historical perspective, in the early 80’s the federal funds rate reached nearly 20% in order to combat inflation caused by President Nixon removing the U.S. from the gold standard. Generally speaking, these rate cuts will have a much larger effect on adjustable-rate mortgages than fixed.
If You Are a Saver
The Fed’s new rate cuts are designed to encourage spending, investing, and stimulate overall economic growth. For all intents and purposes, it makes money “cheaper”. The other side of the coin is that when borrowers and spenders benefit from rate cuts, savings accounts are typically hindered because they are now making less money via interest from savings vehicles. Bank of certificate deposits (CDs) will not be affected because their rate is locked at the time of purchase. If you plan to purchase new CDs, you will have to do so with a lower rate of return.
If You Have Credit Card Debt
Although the credit card companies can change their rates whenever they’d like, if you hold debt with fixed rates, an interest rate cut usually results in no change. Many credit cards with adjustable rates are pinned to the prime rate, so a cut there will typically lead to lower interest charges on your balance.
At its core, The Federal Reserve utilizes its target rate as a very useful (and sometimes controversial) tool of monetary policy. Rates will rise and fall depending on the intricacies of the economic climate, all that we can do is understand their effect on our personal and professional finances, and act accordingly.