Understanding a Fed Rate Cut - Bolton (2024)

FAQs

Understanding a Fed Rate Cut - Bolton? ›

What does it mean when the Fed cuts interest rates? When the Fed cuts interest rates they are lowering the fed funds target rate. This is the rate banks charge each other when lending money overnight to meet the federal reserve requirement.

This is good news for consumers as it likely means lower interest rates on mortgages, car loans, and credit cards, making it more affordable to borrow and spend. The Fed's aim with a rate cut would be to stimulate the economy and employment in order to prevent an economic recession while not reigniting inflation.

One of the most immediate effects of a Fed rate cut is the potential for lower mortgage rates. For prospective homebuyers, this can mean lower monthly payments or the ability to buy a more expensive home than they otherwise could.

Once rates are cut, more buyers are likely to enter the market, causing competition for limited housing inventory to become stronger. And with more buyers for a finite amount of inventory, home prices, which are already averaging over $420,000 now, could rise even further.

The stock market has often seen double-digit returns when the Fed is cutting interest rates, but it depends on what is motivating the Fed's moves. Today, we know earnings have been positive and accelerating, and that has historically been very positive for stocks.

It can put pressure on emerging market currencies and economies that rely on foreign investment. Stock Markets: Lower interest rates can stimulate economic growth and corporate earnings, leading to higher stock prices. However, the impact can vary across different sectors and regions.

Britannica Dictionary definition of CUT–RATE. chiefly US. 1. : selling goods or services at very low prices.

If the Fed were to cut rates more than expected, that could push mortgage rates down further. But if the Fed sticks to the most likely plan and enacts a smaller cut, it's possible that mortgage rates won't move.

Federal Funds Rate

While the rate for each loan is negotiated between the lending and borrowing institutions, the Fed uses open market operations to keep the rate within its target range. The federal funds rate sets the floor for all other interest rates on government and private debt.

Mortgage rates are expected to go down throughout the rest of 2024, and they may continue dropping in 2025. Mortgage rates started ticking up from historic lows in the second half of 2021 and increased dramatically in 2022 and throughout most of 2023.

What are the benefits of interest rate cuts? ›

"The dollar has tended to decline, at least temporarily" around past initial rate cuts from the Fed since the 1990s, according to Marc Seidner, Pimco's chief investment officer for nontraditional strategies, and Pramol Dhawan, a portfolio manager at the investment firm.

The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.

With the Fed about to cut rates, today's cash yields look fleeting. Remember: Bonds have historically outperformed cash during rate-cutting cycles.

Financials, energy, industrials, and small-caps should perform well if the economy is still growing and interest rates are coming down.

If the Fed decides to cut rates by more than 25 basis points or signals a more dovish stance (indicating further rate cuts in the future), it could indeed trigger a fresh rally in gold prices.

The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.

Right now, the Fed interest rate is 5.25% to 5.50%. The FOMC established that rate in late July 2023.