On September 18, the Federal Reserve made the announcement that many were waiting for: It is cutting interest rates. The rate cut of 50 basis points or 0.5% comes after a long wait and with a lot of shock.
Back in 2023, the Fed had promised three interest rate cuts in 2024, and there was a lot of speculation on the market as to when these promised cuts would happen and if three rate cuts were even plausible. At the meeting of the Federal Open Markets Committee (FOMC) in September, they issued the first rate cut, lowering the federal fund rate to 4.75%-5.25%. This was a welcoming surprise to many, given the Fed’s cautious stance of keeping interest rates elevated to tamp down on high levels of inflation.
Understanding how monetary policy in the U.S. works helps to understand what the Federal Reserve System is. The Federal Reserve system consists of the Board of Governors who are appointed by the President and confirmed by the Senate. The Chairperson of the Board of Governors is currently Jerome Powell, who is also the Chairperson of the FOMC. The FOMC meets periodically throughout the year to discuss open market operations, of which interest rates are a key component. The FOMC, in its decision to lower interest rates, has taken action to lower the federal funds rate. The federal funds rate is the rate at which banks and other depository institutions lend funds to each other through an overnight transaction. Lowering the federal funds rate from 5.25%-5.50% to 4.75%-5.25% would lower all other types of interest rates, such as mortgage rates or credit card interest rates.
The reasoning behind the FOMC’s decision to lower rates is multifold. Firstly, the Consumer Price Index (CPI), a tool that measures inflation on the prices that consumers pay for goods and services, showed that inflation had cooled to 2.5% from a high of nearly 10% in 2022 and close to the Federal Reserve’s stated target of 2% inflation. Secondly, the Producer Price Index, which showcases inflation from the perspective of the cost to producers in providing goods and services, lowered to 1.7% in August. This data convinced several Fed officials to support rate cuts.
Moving onto what this rate cut means for average people, there are pros and cons. Many of the pros include revised interest rates for mortgages, auto loans, and interest on credit cards. This is good, as it allows more people to be able to acquire loans and make purchases since the cost of borrowing has decreased.
On the other hand, those who have invested in high yield savings accounts may consider alternative forms of investments due to the lowered interest rates. Additionally, those looking to get into investing and have not locked in bonds since when interest rates were higher may consider alternative forms of investment, as the yields on current bonds issued will not be as high.
With regard to the immediate effects of the Fed’s decision, the stock market soared, and the S&P 500 reached its 39th all-time high of 2024. It is still too early to map out all the effects of the lowered rates, but the Fed has stated that it plans more rate cuts. Therefore, it is best to map out your financial agenda with this information so you can make the best decisions for your future.
