The Federal Open Market Committee (FOMC) decided to cut interest rates by 50 basis points. Thus, the rate decreased from 5.5% to 5.00%. This decision aims to support the labor market and avoid an economic slowdown. The job market and inflation have been declining, which prompted the Fed to make this decision. Market expectations were pointing to this cut. It is worth noting that the last similar cut was in 2008 during the financial crisis.
As a result of this cut, the federal funds rate became between 4.75% and 5%. This rate affects borrowing costs for banks and includes consumer products such as mortgages and personal loans. In addition, the committee indicated the possibility of additional cuts by the end of the year, by 50 basis points. Projections also show that the benchmark rate may decrease by 2% by the end of 2025.
The committee explained that it feels increasingly confident that inflation is heading towards 2%. It saw that the risks related to employment and inflation are balanced. The committee voted by a majority of 11-1 to the decision to cut. While Governor Michelle Bowman favored a smaller cut.
Assessment of the state of the economy and the expected effects of the rate cut: The committee reported that “job growth has slowed and unemployment rate has increased, but remains low.” Officials raised their unemployment rate forecast for this year to 4.4%, from 4% in June. At the same time, the inflation forecast was lowered to 2.3% from 2.6%. Despite the positive economic indicators, the Fed decided to cut rates. GDP has been growing steadily, and the Atlanta Fed expects 3% growth in the third quarter due to strong consumer spending. This cut comes despite inflation remaining above the 2% target, with metrics pointing to a level of around 2.5%.
Key Statements from the US Federal Reserve Chairman
The Fed Chairman stressed that their future expectations are merely readings and not fixed plans. He pointed out the Fed’s ability to react to economic changes, and that there is a plan to deal with any inflationary or recessionary signals. He stated that the risks related to inflation have decreased, while the risks of a calm labor market have increased, which affected the decision to cut interest rates. If the economy continues to be strong while inflation does not decrease, the Fed may move towards a slower monetary policy. He also indicated the possibility of cutting interest rates quickly or adjusting the monetary shift, depending on the economic context and data.
There are no signs that the Fed is in a hurry to address any problems. Regarding the reason for cutting interest rates by 50 basis points, he explained that recent data showed a decrease in jobs by one million compared to expectations. He stressed the collective support for this decision by Fed members. He pointed out that the labor market is still in good shape, and must be maintained. Despite the decline in inflation in real estate and rents, he added that the sectors will need time to balance.
He stressed that the Fed has not yet overcome inflation, and that all data is still under observation. He also expected that future interest rates will be higher, and that the decline in inflation to 2% is not conditional on a weak labor market. Finally, he stressed that retail sales and GDP data indicate the strength of the US economy. Powell added that the Fed’s monetary policy decision yesterday does not mean it is late, but rather a commitment not to be late.
The impact of interest rate cuts on mortgages and credit cards
Potential homebuyers are set to breathe a sigh of relief in 2024, as mortgage rates typically fall as the Federal Reserve cuts interest rates. The decline could help ease the crisis of overpricing homes. In the United States, mortgage rates fell for a fourth straight week, with the 30-year fixed rate hitting 7.07%, the lowest since July. Credit card costs are also expected to fall, as issuers typically rely on the Federal Reserve’s key interest rate to set card rates.
That could ease the financial burden on indebted consumers. How do Fed decisions affect interest rates globally? Higher U.S. interest rates make dollar-denominated assets more attractive. That could draw liquidity from other markets, causing foreign currencies to fall. Some countries find themselves having to defend their currencies, adding to inflationary pressures and making it harder to repay dollar-denominated debt. As the Fed changes policy, that could change.
Some central banks, such as Hong Kong, which pegs its currency to the dollar, could move to match U.S. monetary policy shifts. But European Central Bank President Christine Lagarde said Thursday that policymakers should not lose sight of the fight against inflation for now, while her counterpart at the Bank of England, Andrew Bailey, noted that the battle to tame consumer prices is not over.
The U.S. Labor Department’s July jobs report, released after the central bank’s July 30-31 meeting, showed the unemployment rate rising to 4.3% as job growth slowed. Although the August report showed the unemployment rate falling to 4.2%, it included evidence of a continued slowdown. Powell said the labor market was strong and inflation was on track to the Fed’s 2% target. He added that today’s rate cut was aimed at maintaining that trend.
Are your investments affected?
After Powell’s speech, markets from global stocks to corporate bonds rose, posting their best performance since a Fed meeting in 15 years. Rate cuts are seen as a positive factor for stocks, especially growth stocks that rely on future corporate earnings. Riskier assets, such as low-yield technology stocks and high-yield bonds, are also supporting the trend.
“The Fed’s statement has given investors the green light to buy riskier assets aggressively, assuming the central bank is not worried about a recession,” said Matt Maley, head of market strategy at Miller Tabak+. Assets around the world are benefiting from the US rate cut. “The change in monetary policy is positive for equity markets and the US dollar, supporting Asian equity prices, although Japan may face challenges due to a stronger yen,” explained Chamath De Silva, fund manager at BetaShares Holdings.
What does this mean for cash savings? Cash savings yields have been booming, with interest rates topping 4% on many high-yield savings accounts in the US. In Australia, the highest interest rates on savings are around 5.7%, while in New Zealand, one-year deposits are above 6%. But the rate cut could mean the end of this golden age, as banks adjust their yields in line with benchmark interest rates. However, competition among banks to attract deposits may prevent a rapid rate cut. In terms of exchange rates, the current situation is not in favor of the US dollar. All G10 currencies rose against the dollar, and this trend continued the next day in Asia.
