The Fed Cuts Interest Rates for First Time in 11 Years

The Federal Reserve lowered its benchmark interest rate a quarter of a percentage point in hopes of preventing economic downturn.

On Wednesday, Fed Chairman, Jerome Powell, announced at a news conference that the country’s central banking system will reduce the interest rate to a range of 2 percent to 2.25 percent after the Fed’s Committee voted in favor 8-2.^[1]

“The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook,” Powell said. “It [the cut] is intended to ‘insure’ against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are currently having on the economy, and to promote a faster return of inflation to our symmetric 2 percent objective.”

What do the Fed’s cuts mean to consumers?

The Fed’s main purpose is to stimulate maximum employment, price stability for consumers, and moderate long-term interest rates.

The reduced rate is called the federal funds rate, which is the interest banks, credit unions, and other financial institutions charge each other for short-term – typically overnight – lending. It’s used to control available funds, which in turn affects inflation and other interest rates. ^[2]

The Central Bank intends for the cut to stimulate consumer spending and give incentive for businesses to invest and hire more.

Most consumers don’t do overnight borrowing the way that financial institutions do, so they may not notice much of a difference. But the move will affect interest rates on their everyday borrowing and saving.

The cuts have been anticipated by financial institutions, so it’s already included in longer-term lending like auto loans and mortgages, according to ABC news.^[3] Consumers with investments in money market funds or CD deposits may notice a small change.

Why lower the interest rate now?

Fed Chairman Powell has been under pressure to make aggressive cuts from President Trump, Wall Street, and members of his own policy committee.

The Fed raised the interest rate four times in 2018^[4] – something the president says is slowing down the American economy. But Powell didn’t confirm whether the Fed plans to favor his critics’ wishes this year.

“Let me be clear: What I said was it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that,” Powell said. “What we’re seeing is that it’s appropriate to adjust policy to a somewhat more accommodative stance over time and that’s how we’re looking at it.”

The Fed Chair quickly came under fire from the president shortly after the announcement.

“As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation,” Trump Tweeted.

….As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

— Donald J. Trump (@realDonaldTrump) July 31, 2019

“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.”

In the meantime, the Fed plans to take a conservative approach to make further cuts.

“As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook,” Powell said, “and will act as appropriate to sustain the expansion.”