Federal Reserve Board Cuts Rates, Creates Uncertainty

by Bennett Schmanski
Intern – American Deposit Management
UW-Madison – Class of ‘21

The Federal Reserve Board voted in favor of dropping the federal funds target rate by 25 basis points, to a range of 2 – 2.25%.  According to CME Group’s FedWatch tool, this was a widely expected move. Leading into Wednesday’s Fed Policy meeting, the tool indicated an 80% probability of a quarter-point cut.

Powell’s Comments Generate Uncertainty

Jerome Powell acknowledged the current strength of the U.S. economy. However, he cited growing trade uncertainties, slowdowns abroad, and muted inflationary pressures as the main drivers of this “insurance” cut to interest rates.

Powell left the door open for future rate cuts, but also called this move a “midcycle adjustment” to temper expectations for more cuts. This confusing rhetoric left many on Wall Street wondering what to expect from the Fed in upcoming meetings.

How will this rate cut impact the economy?

Many economists are doubting the power of a single quarter-point cut, so there are some that predict at least one more quarter-point cut by the end of the year. They believe this will be needed to help spur business investment that has been stifled since the trade war reignited.

The current global economy is experiencing significant crosswinds, so it is difficult to predict the impacts of this quarter point cut with any certainty. In general, lower rates are inflationary. They tend to help stocks and spur lending, but numerous other variables can quickly overcome these impacts. Signs of a slowing global economy and rapidly escalating trade wars seem to contradict the strong indicators coming from the US economy.

What does the rate cut mean for business?

This rate cut means that interest rates across the board should fall, if they have not dropped already in anticipation of the cut. Many banks have already been pricing in the high probability of a rate cut, as we saw them slowly dropping their rates throughout the month of July. Other banks have their rates directly tied to the fed funds rate and dropped them along with the policy rate announcement on Wednesday.

For business, rates on your variable rate investments, such as deposit accounts, CD’s and bonds will likely fall.  On the other hand, variable rate financing charges for things like lines of credit and credit cards should see a corresponding drop. The impact of this quarter point shouldn’t be large enough to change how most organizations do business, but it’s always smart to keep an eye our for opportunities to optimize your debts and investments.

Say Hello to Smarter Cash®

As an American Deposit Management Co. customer, you may see rates on your liquid accounts fall as local banks adjust their rates to account for the rate cut. However, we have leveraged fintech to gain an important advantage. We can access our FDIC / NCUA insured network of financial institutions to get nationally competitive rates on your deposits – even in a declining interest rate environment.

Would you like to know more about how our Deposit Management service works? Contact a member of our team and get started today!