The United States Federal Reserve is expected to make its second rate cut in as many months this week. It is anticipated they will slash rates by a quarter of a percentage point in what seems likely to be the second out of three cuts this year.
The move would come at a time where solid data critical to such a decision is sparse. The Bureau of Labor Statistics typically publishes data on the U.S workforce every month, but due to the government shutdown, the most recent unemployment estimate came in August, when it was 4.3%.
Despite that, states have continued to submit unemployment claims data to the Labor Department’s publicly accessible database, which has allowed economists to cobble together a picture of a labor market that is continuing to slow down.
This, combined with inflation readings being lower than expected, makes for conditions that favor a rate cut, however the Fed seemed keen on making a second rate cut even before seeing the results of the first.
In a press conference after the first rate cut, Jerome Powell alluded to “additional adjustments”. The Federal Open Market Committee’s Summary of Economic Projections was released the same day, and revealed that at the time, policymakers assessed the appropriate federal rate as somewhere in the range of 3.5 to 4.00 percent. That sparked rampant speculation that a third rate cut would come in December, as it would take two quarter-point rate cuts to achieve a rate below 3.75.
Markets have taken that speculation and run. That information, combined with an unprecedented level of political pressure from the Trump Administration, appeared to lead the market to bet on additional cuts.
U.S President Donald Trump desires lower interest rates, and has vehemently expressed his frustration with Jerome Powell for not lowering them as much as he’d like. He has also started a messy legal battle with the Federal Reserve Governor, Lisa Cook, who he tried to fire, despite not having the legal jurisdiction to do so.
How Rate Cuts Affect You
A lower federal funds rate encourages banks to lower their prime rate, which they did after the September 17th rate cut. The prime rate is the baseline interest rate for mortgages, personal loans, credit card loans, and more. A lower prime rate usually means you can get a lower interest rate on a loan, and owe your lender less money over time compared to the old rate.
It is important to remember that your lender lowering their prime rate does not mean that the interest rate on an existing loan you have is automatically lowered. Fixed-rate loans, for example, are locked in at the interest rate agreed upon when the loan was taken out.
In those scenarios, rate cuts can serve as an opportunity to refinance your loan with a more favorable interest rate, saving you money over time. Since rate cuts make borrowing cheaper, they can also be favorable times to take out a loan. Keep in mind that the state of your personal finances is not taken into account in this article, and is the most important factor when considering taking out or refinancing a loan. If you are considering doing one of those things, make sure to consult with a financial professional to make sure it is an appropriate course of action for you.
*This article is for informational purposes only and does not constitute financial advice*
