Looking for a get-rich-quick scheme? Here’s one which’s guaranteed to repay. Find someone who doesn’t consider the Federal Reserve (Fed) will cut rates of interest next month, give them the percentages they need, and put all of your money on it.
(Editor’s note: The preceding paragraph doesn’t constitute sound investment advice and doesn’t reflect – even remotely – the investment approach of Saving Advice, its employees, management or anyone they know.)
All joking aside: The most significant finding from the annual Economic Symposium at Jackson Hole, WY last week, says rate of interest cuts are coming. And what’s more, those cuts might be deep.
When the Fed talks concerning the federal funds rate, it means the rate of interest charged to business banks after they lend or borrow money from one another. Consequently, changes within the federal funds rate directly affect the interest you pay on consumer loans and financing.
In addition, rate of interest cuts could trigger a decline in consumer prices – although price declines typically follow rate of interest cuts several months later.
Indications of impending rate of interest cuts
“It is time to adjust policy,” said Fed Chairman Jerome Powell in his official Notes on Jackson Hole. “The direction is clear, and the timing and pace of rate cuts will depend on upcoming data, the evolving outlook and the allocation of risks.”
Even before Jackson Hole, the July meeting of the Federal Open Markets Committee (FOMC), the Fed’s interest rate-setting wing, signaled growing support for a rate cut.
“All participants supported maintaining the target range for the key interest rate at 5¼ to 5½ percent,” the Minutes of the July meeting“although several noted that recent progress on inflation and the rise in the unemployment rate had provided a plausible argument for a 25 basis point reduction in the target range at this meeting or that they could have supported such a decision,”
Extent of rate of interest cuts
In addition to its September 18 meeting, the Fed will meet again on November 7 and December 18. Interest rate cuts could occur at all or any of those meetings.
The Fed typically cuts rates of interest by 1 / 4 of a percentage point, but a deeper cut of half a percentage point might be possible. The August employment report, due on September 6, will likely play a serious role in determining the dimensions of a rate adjustment.
Although the present unemployment rate of 4.3 percent is at a historic low, Powell has indicated that the Fed wants to stop this rate from rising.
“We do not seek or welcome a further slowdown in the labor market,” Powell said last week.
Interest rate traders and bond markets expect significant cuts.
A barometer that CME Group FedWatch toolassumes that the important thing rate of interest will fall by a full percent by the top of the 12 months. This would put the rate of interest at 4.25 to 4.50 percent, as an alternative of the present 5.25 to five.50 percent.
The FedWatch tool measures the probability of a change within the Fed Funds Rate based on futures contracts on the Chicago Mercantile Exchange.
How rate of interest cuts affect you
Lowering rates of interest would lead to lower borrowing costs for you and businesses. This would result in continued consumer spending, economic growth, and latest hiring at businesses.
When it involves investing, lower rates of interest are inclined to boost financial markets. It is believed that rate cuts result in growth and better profitability. As a result, market sentiment and stock prices often rise when rates of interest fall.
Recession risk
The Fed’s primary job is to maintain inflation low while maintaining full employment. This generally is a difficult balancing act. A change an excessive amount of in a single direction or the opposite can result in financial distress or disaster.
A significant fear within the Fed’s fight against inflation was that the central bank’s aggressive rate of interest policy over the past 12 months could plunge the economy into recession. That’s why Powell has repeatedly stressed that the Fed is aiming for a “soft landing.”
A 12 months ago, there was loads of hand-wringing and gnashing of teeth on the prospect of a soft landing that might avoid a recession. But a 12 months could make an enormous difference. Today, most analysts expect the economy to desert its R rating (for recession) in favor of a PG rating (for overall prosperity).
One of the important aspects behind the economy’s strength has been robust consumer spending. However, there are signs that without rate of interest cuts, we consumers may not have the ability to maintain up with that pace.
Credit card debt has exceeded the $1.1 trillion mark and Arrears have increased for eleven consecutive quartersin line with the economic data from the US Federal Reserve. However, as of August 19, only 3.25 percent of American bank card holders were delinquent.
“We currently appear to remain on a path of modest, stable economic activity, and there are no signs of a serious recession threat,” said Rob Haworth, senior director of investment strategy at US Bank Wealth Management. “However, a big question that could determine the markets and the timing of Fed rate cuts is whether consumers can continue to spend at a sufficient rate to sustain economic growth.”
Some uncertainty
As mentioned in the beginning of this text, federal rate of interest cuts are coming. The only surprise is precisely when, what number of cuts there can be, and by how much they’ll fall.
Powell has all the time stressed that the Fed’s decisions are based on data. In recent years, inflation has been crucial factor influencing the central bank’s decisions. But as inflation falls, Powell and the Fed are turning their focus to unemployment. As a result, labor market developments will likely have the best impact on the frequency and magnitude of rate cuts through the top of the 12 months.
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