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Long Story Short - Fed Rate Cut on the Horizon?
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With the ongoing trade tensions with China, the Fed is unsure of how this will affect the U.S economy in the long term, but talks of interest rate cuts are on the table, although the U.S. is expected to have a strong 2019. The S&P just hit a record high for the first time in nearly two decades, but many still believe the interest rate cut is needed. Many policy makers want to wait for a stronger sign of an economic downturn, while others believe that the cut should be implemented over the next six months.
Lower minimum payments on loans and credit. An interest rate cut lowers the minimum monthly payment for borrowers with adjustable rate loans. Credit card users may also have a positive incentive with lower interest rates if they have a variable rate. With lower monthly minimum payments, consumers may spend more, stimulating the economy. Businesses can also take out loans to hire more staff and expand offices.
Offset potential slowing of economic growth. Cutting interest rates typically means a spending incentive as Americans concern over the uncertainty of the ongoing trade wars with China could steady economic growth. Cutting rates, from a future outlook, could stimulate the economy as consumers will feel more confident in the market. More consumer spending fuels not only the real estate market, but stimulate small business as well. People feel more comfortable spending money on things classified as wants or luxury items.
Increased investing. Lower interest rates make investing more attractive to most. People with small businesses or a dream of starting a small business can do so with less risk and more ease. With more money in circulation in the average consumers pocket, there is a higher chance of consumers investing in new projects that they wouldn’t have otherwise considered.
Savers earn less. With interest rates taking a cut, savers fall on the short end of the stick. CD rates and savings accounts rates fall, which makes it harder for savers to earn reasonable interest on their money in a traditionally safe way. With less return on their savings, these consumers may feel they have to take on riskier investments they aren’t familiar with, thus putting them in a tough financial situation. Retirees are largely impacted in times of low interest rates.
Banks see less profit. With low interest rates and less customers saving, the banks have less money to lend out. People turn to investing when rates are so low, in hopes of generating a higher return than if they left their money in a savings or checking account. With lower interest earned on money at the banks and increased borrowing, the banks are forced to borrow more, leaving them with less profit and more risk.
Limited government options. Keeping inflation rates low for prolonged periods of time leaves the government in a tight spot. When the economy takes a downturn, the first move the Fed makes is to cut interest rates. If the rates are already low and a hard time comes, the interest rate will near zero, or possibly negative, which is ever harder to recover from. After long periods of time with low rates, the Fed has to raise rates during a strong economy just to prepare for a potential downturn in the future.
Whether the individual is a borrower or a saver, everyone is effected by an interest rate cut in one way or another. By borrowing, consumers are putting more money in circulation, which shows an increased confidence in the economy. Savers earn less but are encouraged to put their money in places they haven’t thought to before. Although a definite answer on an upcoming interest rate cut cannot be confirmed, it is reasonable to predict that one will be on the way sometime soon.
Kevin L. Kliesen April 1, 2011
Araceli Crescencio, July 1, 2019
Jill Cornfield, July 1, 2019
Christopher Condon and Brian Swint, July 2, 2019
Marc Jones and Navdeep Yadav, July 2, 2019
https://www.cbsnews.com/news/federal-reserve-could-cut-rates-to-offset-trade-war-effects-stocks-rise/, Irina Ivanova, June 4, 2019