When The Fed Cuts Interest Rates, Stuff Happens

 

The July 2019 announcement by the Fed to expect an upcoming cut in interest rates has businesses, consumers and financiers alike responding in one way or another. The Federal Reserve has the power to make a rate change that impacts many facets of our economy as well as investors and borrowers. A rate cut in particular, while predicted at only a quarter of a percent in the coming months, will produce some interesting results for many. Let’s consider why the Federal Reserve cuts interest rates in the first place and how they go about it.

Why Do The Feds Cut Interest Rates

When the Federal Reserve chair suspects risks in the US economy, an interest-rate cut is usually imminent. In the case today, according to an article in the New York Times, Chairman Jerome Powell believes the US faces new risks and uncertainties due to impending trade wars and a worldwide economic slowdown even though the US economy is currently stronger than ever.

Other factors the Fed considers in terms of an interest rate cut include modest price gains. With inflation up 1.5% at the end of May, this figure is below their 2% target. Weaker prices present a problem with higher-risk deflation that could harm the economy. Then rates can’t go much lower in the case of a downturn. Slower wage growth is also a factor for the Fed. Even while unemployment rates are at a 5-decade low, wages to support new jobs have not significantly increased as expected when there are fewer workers than jobs.

How Do The Feds Do It

The Federal Open Market Committee (FOMC) meets eight times per year to discuss monetary policies, review the current economic state, and potentially set a new rate. Keep in mind; the federal funds rate is “the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis,” according to Investopedia. They state, “The FOMC makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation, recession, or other issues.” Once the FOMC members decide on the new rate, The Federal Reserve Chair sets a target date and also testifies before the US Senate Banking Committee. On June 19, the FOMC made this statement, “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

How Does a Federal Rate Cut Impact Consumers and Investors?

A federal interest rate cut can help or hurt consumers and investors. Sally Krawcheck, the Co-Founder and CEO of Ellevest, said it best in a CNBC interview (see article), “While it’s hard to predict, generally, a rate cut is good for borrowers, bad for savers, and mixed for investors.” Consider how a rate cut may impact you: Credit Card Interest Rates. Credit cards with variable rates that are connected to our prime rate (generally 3% above the federal fund rate) are impacted. An increased rate by the Feds causes credit card rates to go up, costing consumers more. This, in turn, causes consumers to buy less and slow the economy. On the other hand, a drop in the federal rate would generally be a plus for credit card holders.

Certificates of Deposit (CDs). If you hold certificates of deposits (CDs), an increased rate by the feds may be to your advantage. CD rates generally follow interest rates. The impact may depend on whether you own a short- or long-term CD, and taking inflation into account.

Jobs and Wages. The labor markets and employment are vital topics for the FOMC in their regular meetings. They use payroll, the labor force, and length of unemployment in part of their decisionmaking. When the Fed raises rates, a slowdown in the economy is expected. Fewer people are hired, and pay raises may come to a standstill for a time.

Mortgage Rates. While it is possible for some mortgage rates to go up with a Fed increase on shortterm rates, it is also common for rates to fall. History shows unexpected outcomes for mortgage rates between 2004 and 2019. This is an area that is not as easy to predict, based on the central banks’ actions and other factors.

Retail Prices. Federal interest rate changes impact the prices you pay for goods and services, which in turn impacts peoples’ desire to spend. When costs are low, and money is available, demand goes up along with prices. Even with all of the good news today for the economy, the labor market and unemployment, the Fed worries about wages going up and impacting inflation. The Fed then raises the rate to fight inflation.

Savings Accounts. While savings accounts and other retirement accounts are again hard to predict when a rate change is announced, it is possible that annual percentage yield (APY) will decrease for saving account holders depending on the contract with your banking or financial institution.

Gold and Silver Investment To Offset Federal Rate Changes

When the Federal Reserve slashes interest rates, the prices of gold and silver go up. When interest rates go up, the prices of gold and silver go down. When you want to make a sound investment for your future that is not severely impacted by the government, consider precious metals. You have more control over your assets, and they are certain to take you through every economic transition. Check in with Reagan Gold Group for a long-term investment plan with integrity. Now is a great time to make a gold or silver investment, before the next federal rate hike and while prices are reasonable. Buy gold or silver now for a sensible retirement alternative that gives you more control of your assets.

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