For the first time in nearly 11 years the Federal Reserve has cut a key interest rate by one-quarter of a percentage point. This has been done in order to provide a boost to the current domestic economy as well as guard it from global economic uncertainty stemming from events such as Brexit and a potential trade war with China.
The last time the central bank cut rates were during the 2008 recession. Rates remained hovering around zero until 2015 when the Federal Reserve began to raise rates again, and have done so nine times since to guide the economy back to where it was prior to the recession. Now the cut appears to be to provide a buffer from global uncertainty in the market as well as to prevent a total collapse like there was in 2008.
Federal Chairman Jerome Powell has been continually harassed by President Trump to cut fed rates. Trump believes that the previous hikes came “far too early and far too severely,” and that it puts people at a disadvantage compared to other countries’ central banks who have already been cutting rates.
However, Powell hasn’t really entertained much of the presidents push because the Federal Reserve should be independent from political pressure. The reason the rate was cut now despite the historic last ten years of economic growth, an impressive unemployment rate at 3.7% and a thriving market is to guard the domestic economy of rising geopolitical tensions. This includes both Brexit as well as the uncertainty over trade negotiations with China.
The most noticeable change people will experience in their day to day life is the inter-banking rate now set between 2% and 2.25%. This rate is the benchmark used by financial institutions to determine interest rates on things like credit cards, car loans and home equity loans. Lowering rates tends to lead to more business investments as well as boosting consumer spending.
