What the New Lower Federal Interest Rate Means
Interest rates are going down. The Federal Reserve has reduced its federal interest rate by 0.25%. The overnight lending rate is the basis for lending between banks and affects the rates offered to consumers for various loans. The last rate cut was almost twelve years ago after the real estate bubble burst in 2008. Conversely, rates have been raised nine times in nearly four years.
What is the Federal Reserve?
The Federal Reserve, or the Fed, was created in 1913 to stabilize the financial system in the United States. It’s also known as the central bank of the US and one of the most powerful financial institutions in the world. The Fed controls the monetary policy for the US. Its mandate, set by Congress, is “maximum sustainable employment, stable prices, and moderate long-term interest rates.” The Fed uses increasing and decreasing interest rates to combat the effects of inflation and stimulate the economy.
Reasons for the Decreased Federal Interest Rate
This latest reduction is said to mitigate global risk amid worsening relationships and trade concerns. The stock market and the current administration wanted a more significant decrease of 0.50%. The stock market reacted negatively to the news since lower rates present a weak economy. The S&P 500 decreased over 1%, to its lowest point in the last two months.
The Fed Chairman, Jerome Powell, alluded to the possibility of more cuts. However, there are no long-term cuts planned. The rate decrease was to prepare for future economic uncertainties. The administration is not particularly happy with the initial reduction and blames Mr. Powell’s policy decisions for slow economic growth. However, unemployment has been low for quite some time, and inflation has been steady. Conservative decreases as a preventative measure may contribute to more prolonged results.
What It Means When Interest Rates are Low
Federal interest rates affect how much it costs to borrow debt. Consumers are more likely to make big purchases when rates are lower. The hope is that lower rates will decrease spending on debt and increase consumer spending elsewhere. Lower rates also incentivize businesses to take out loans for expansion, equipment, and other enterprising efforts. Rates usually are reduced when the economy is in a recession, so this an unusual situation. The economy is strong, yet the Fed decreased the rate. The Fed previously reduced the rate to combat recession in 2003. The rate was 1.25% then. The current rate range is 2 to 2.25%
If you’re looking to finance a property, a car, or business expenses, now may be the time to strike. Also, now be a great time to refinance. If you took out a loan within the last four year, when the rates were increasing, the lower rates might be especially appealing. You may see a significant reduction in your monthly payments or total interest paid over the life of your loan. However, don’t feel pressured to accrue unnecessary debt because rates are low. The economy and markets are cyclical. Stick to your goals and financial plan.