Fed signals interest rate cut coming soon: Why you should care

By The FedFOXBusiness

The potential impact of the Fed adopting a dovish tone

Sit Fixed Income Senior Vice President Bryce Doty on Federal Reserve policy and U.S. trade negotiations with China.

Federal Reserve chairman Jerome Powell heavily hinted this week, during testimony before Capitol Hill, that an interest rate cut is likely to occur at the end of the month.

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"Based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted," Powell said in prepared remarks before the House Financial Services Committee.

But while that decision has been cheered by investors and Wall Street – the Nasdaq Composite notched a record-high after Powell's appeared before the House – what does it mean, exactly, for your own personal finances?

The benchmark federal funds rate – which policymakers at the U.S. central bank voted to raise four times in 2018, to a range between 2.25 percent and 2.50 percent – can affect consumers by increasing borrowing costs. That includes things like auto loan rates and 30-year-fixed mortgage rates; even a slightly lower rate for both can mean thousands of dollars in savings for consumers.

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For consumers, that can be both good and bad news, according to Curt Long, the chief economic and vice president of research at the National Association of Federally-Insured Credit Unions.

“It kind of depends on which side of the fence they’re on,” he said. “If you’re potentially going to be a borrower in the near future, the fact that the Fed seems determined to be patient, in their words, is probably good news. It means rates will probably stay lower than they would have otherwise. On the other hand, if you’re a saver, that might not be as good of news for you.”

That’s because some banks and credit unions will increase their savings rate during Fed hikes, making it a good chance for consumers to earn more on their savings.

The correlation isn’t quite so direct, however: The Fed raises the cost of borrowing for banks, which in turn passes that along to consumers. Congress tasked the central bank in 1977 with promoting “maximum employment, production and purchasing power” by keeping the cost of goods stable and creating solid labor-market conditions.

One of the most potent tools in the Fed’s arsenal includes interest rates.

Typically, when policymakers are trying to spur additional consumer spending, they lower interest rates to reduce the cost of borrowing (during the financial recession in 2008, for instance, the Fed lowered it to effectively zero and did not raise it again until 2015). Conversely, to avoid inflation and cool the economy, it will raise rates to make it more expensive to borrow.

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Generally, the Fed tries to maintain a federal funds rate between 2 percent and 5 percent. In January, the Federal Open Market Committee voted to keep it steady at 2.25 percent to 2.5 percent -- and signaled they were unlikely to change it amid some geopolitical turmoil, like Brexit uncertainty and a U.S.-China trade war.

However, as those uncertainties have persisted and the economy began to soften, the Fed started to make the case for a rate cut, with Powell stressing that the central bank will "act as appropriate" to sustain the 11-year economic expansion.

"Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective," minutes from the most recent FOMC meeting said.

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