The Federal Reserve announced on September 18, 2019 a second interest rate cut this year. Following its two-day policy meeting, the central bank announced that it would lower its benchmark overnight lending rate by 0.25% to a target range of 1.75% to 2%.
The move comes approximately two months after the Federal Reserve went ahead with its first cut in 11 years. That cut was also a 0.25% drop. It was the first time the Federal Reserve lowered interest rates since the Financial Crisis.
The Fed explained the interest rate decreases this year primarily as a preemptive move on their part. “We took this step to keep the economy strong,” Fed Chairman Jerome Powell said. Lower interest rates generally encourage economic activity through lending and business expansion. However, lower interest rates hurt savers who live on interest income from investments like bonds and money markets.
Now the Fed must follow a delicate balancing act. Moving interest rates too low too quickly could spook markets into thinking the Fed foresees a recession. Luckily, Powell said in his statement on September 18 that is not the case at this time. He also stated he does not anticipate the U.S. central bank moving into the realm of negative interest rates as seen in Europe and Japan.
The Fed decision was not unanimous by the voting members. Two officials voiced concerns that the U.S. economy isn’t in need of an extra boost from rate cuts, while one official favored a deeper, half-point cut. Similarly, the outlook for future rate cuts is up in the air. According to the Fed’s “dot plot” of individual expectations, five members thought the Fed should have held its previous range of 2% to 2.25%, five approved of the 25 basis point cut but keeping rates there through the rest of the year, and seven favored at least one more cut this year.
Our team will continue to stay abreast of interest rates and the markets. We will continue to help our clients position their portfolios for their unique financial goals within the context of broad economic developments like these.