Why is the Fed Cutting Rates?

Today, the Federal Reserve cut interest rates by 0.25%. The rate cut was anticipated by many due to sluggish economic growth abroad and softening economic growth at home. It’s important to note though, that there are still areas of strength in the economy, such as employment and consumer spending. Economic growth even came in higher than expected in today’s third quarter GDP report. As such, the cut could also be viewed as an insurance policy against external threats like the trade war.

When the Fed lowers rates, it has an impact on pretty much everything financial. This means it has an effect on lending rates, but it also on high-yield accounts like money market accounts, CDs, and savings accounts.

So, why did the Fed cut rates, and what does it mean for you?

Why Did the Fed Lower Rates?

Increased global uncertainty and softening domestic economic data usually leads to a more accommodative stance from the Fed. The biggest factors that probably informed the Fed’s decision are the trade war with China and recent recession fears. While there’s been somewhat of a cease-fire with China for now, that truce is on pretty shaky ground. Domestically, inflation remains subdued, manufacturing data is coming back soft, and business investment is showing signs of slowing. Throw more global uncertainty into the mix with the increasingly tangled web that is Brexit and a shaky European economy and there’s some pretty strong headwinds happening.

When there are troubling signals like these, the Fed might elect to lower interest rates like they did today. And on the other hand, if the economy is growing in a way that might lead to inflation, the Fed might decide to raise interest rates. Basically, interest rates are a way for the Fed to regulate the economy as it attempts to prevent overheating or stalling out.

But, it’s also worth reminding ourselves that inflation and borrowing rates remain low, as does unemployment. The economy is overall still going strong, so it may be too early for the Fed to really evaluate whether the truce with China will hold or if some of the signs of weakening economic data will continue.

How Does the Rate Cut Impact You?

There are several ways that a rate change affects consumers. When the Fed cuts rates like it did today, you might benefit from lower lending rates. However, a rate cut can also negatively impact you by lowering your annual interest rate on high-yield accounts like money market accounts, CDs, and savings accounts. These things generally move with the Fed, so if the rate-cutting cycle stops, or the Fed hikes rates again in the future, all of these things will change again.

Our Take

While this rate cut was largely anticipated, it’s our opinion that it might be a little early to tell if some of the signs that probably led to this decision warrant this accommodative stance from the Fed, or if the economy will course-correct. Although there are some less-than-positive forces both abroad and domestically, the overall U.S. economy remains strong so this cut might have been a little premature, especially since there is another Fed meeting in December.

Read More: Market Commentary

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