The US Federal Reserve, led by Chair Jerome Powell, made a significant move by cutting interest rates for the first time in four years on September 18, 2024. The Federal Reserve lowered the federal funds rate by 50 basis points, or 0.5%, bringing it to a range of 4.75% to 5%.
This action marks the first interest rate cut since 2020 and aims to support ongoing economic growth.
What is the Federal Funds Rate?
The federal funds rate is a key interest rate set by the Federal Open Market Committee (FOMC) of the Federal Reserve. It’s the rate at which banks lend money to each other overnight. By changing this rate, the Fed influences the cost of borrowing throughout the economy.
Why Did the Fed Cut Rates?
A rate cut occurs when the Federal Reserve reduces the interest rate it charges banks. This rate serves as a benchmark for other interest rates in the economy. By lowering the rate, the Fed makes it cheaper for banks to borrow money, which often leads to lower interest rates on loans for consumers and businesses.
The Fed decides to cut rates when the economy shows signs of weakening, such as higher unemployment or slowing growth. Lower rates encourage borrowing and spending, which can boost economic activity. This adjustment is part of the Fed's goal to balance economic growth with inflation.
Jerome Powell’s Address
During the Federal Open Market Committee (FOMC) meeting on September 18, Chair Jerome Powell explained the Fed's decision. He highlighted the need to support economic growth while keeping an eye on inflation risks.
“Inflation has eased substantially from a peak of 7% to an estimated 2.2% as of August. We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2% goal,” Powell said.
Impact on Everyday Life
The recent rate cut will likely affect many aspects of daily life:
Lower Mortgage Rates: Homebuyers and those refinancing mortgages will benefit from cheaper rates, potentially boosting homeownership and stimulating the housing market.
Reduced Credit Card and Loan Interest: With lower rates, credit card and personal loan interest will decrease, helping individuals manage debt more effectively.
Increased Consumer Spending: Lower interest rates mean more disposable income for consumers, which can drive economic growth and job creation.
Potential Job Growth: Businesses may expand and hire more workers due to lower borrowing costs.
However, there is a downside:
Savings: Lower interest rates can decrease the returns on savings accounts and other interest-bearing investments, leading to reduced earnings on stored funds.
Impact on Financial Markets
The rate cut also affects the financial markets:
Stock Market Rally: Investors often see rate cuts as a positive sign, which can lead to a rise in stock market prices.
Bond Prices Increase: The value of existing bonds tends to go up as they offer higher returns compared to new bonds issued at lower rates.
Currency Depreciation: The US dollar may weaken, making American exports more competitive internationally, which can benefit the economy.
