11:03 a.m. ET, August 21, 2019
Why did the Fed cut rates? Will they cut rates again?
Your questions, answered
The Fed
cut rates at its last meeting, because it too, was starting to get nervous that signs of economic weakness around the globe and the trade war with China might eventually start to hurt the US economy.
Think of it as an insurance policy: The US economy isn’t grounding to a halt, but in an effort to get ahead of any downturn the Fed decided to cut rates by 25 basis points.
The other big reason for the Fed to act sooner rather than later is that it has much less room to cut from. Interest rates, which control the cost of mortgages, credit cards and other borrowing, are now hovering between 2% and 2.25%.
When rates are that low, the Fed has less ammo to rescue the economy. Instead, Fed officials have made the argument to cut rates more aggressively early, because they’re fighting power will only be stronger.
So could they cut rates again? It might be inevitable, and Wall Street is certainly on betting on it.
At their last meeting, the Fed’s Powell didn’t shut the door completely on further rate cuts, but was also careful not to send the message the central bank had now begun a series of rate cuts.
But in the last three weeks, there’s been worsening economic data abroad and President Trump threatened to escalate further tariffs on China — only to pull them quickly back two weeks later. Bond markets also started flashing warning signs a recession may be coming soon, which the Fed will need to strongly consider.
We’ll know more later today when the Fed releases minutes from its last meeting. That might give us a hint of how much agreement there is on the board to cut further, or whether it’s more important to see how the economy and trade developments evolves.
Then on Friday, we’ll also hear from Powell directly, so he may be even more exacting in what comes next for interest rates policy when he speaks from Jackson Hole. Stay tuned.