Interest Rates & The Federal Reserve

Interest Rates & The Federal Reserve

September 26, 2023

Last week the Federal Reserve chose to pause and keep current interest rates the same, for now. Further conversation and data reported from the FED indicated that there is the possibility for one more rate hike by the end of the year along with two potential rate cuts in 2024.

We would like to give you some context into what rate cuts have historically done to the economy:

Stimulating Borrowing and Spending: Lowering interest rates makes borrowing cheaper for consumers and businesses. When interest rates are reduced, individuals are more likely to take out loans for things like homes and cars, and businesses are more inclined to invest in new projects and expand operations. This increased borrowing and spending can stimulate economic activity and growth.

Encouraging Investment: Lower interest rates can make it more attractive for businesses to invest in capital projects and equipment. This can lead to increased productivity and job creation, which in turn can boost economic growth.

Weakening the Currency: Lower interest rates can lead to a decrease in the value of a country's currency in the foreign exchange market. A weaker currency can make a country's exports more competitive in international markets, potentially boosting exports. However, it can also lead to higher import prices, potentially contributing to inflation.

Higher Stock Prices: Lower interest rates can make alternative investments, such as bonds, less attractive compared to stocks. This can drive up demand for stocks, potentially leading to higher stock prices. Many investors view lower interest rates as a signal that the central bank is attempting to support economic growth, which can further boost confidence in the stock market.

Housing Market: Lower interest rates can lead to lower mortgage rates, making homeownership more affordable. This can stimulate demand in the housing market, leading to increased home sales and potentially higher home prices.

Consumer Spending: Lower interest rates can also lead to lower interest payments on existing debt, such as credit card debt and adjustable-rate mortgages. This can free up disposable income for consumers, potentially leading to increased consumer spending.

Risk of Inflation: While lower interest rates can stimulate economic growth, they can also contribute to inflationary pressures if the economy overheats. The central bank typically monitors inflation closely and may raise interest rates to cool down the economy if inflation becomes a concern.

Income Distribution: The impact of lower interest rates on different segments of the population can vary. Those who rely on interest income, such as retirees with savings in fixed-income investments, may see a reduction in their income. Conversely, borrowers benefit from lower interest rates as their interest payments decrease.

It's important to note that the Federal Reserve adjusts interest rates as part of its monetary policy to achieve its dual mandate of price stability and maximum sustainable employment. The specific impact of rate cuts can vary depending on the broader economic context and the central bank's goals at the time. Additionally, the effectiveness of interest rate cuts in influencing the economy can depend on factors like the level of consumer and business confidence and the willingness of banks to lend.