The Fed Cut Rates Again: Take Advantage of Lower Interest Rates

Think beyond today’s headlines and project your needs a half business cycle ahead from now. Let your competition worry about today while you gear up for the next business cycle rising trend.

In its most recent meeting, the Federal Reserve lowered the federal funds target rate to 1.5–1.75%. This was the third rate cut in 2019. However, Fed Chairman Jerome Powell potentially signaled that the change could mark the end of the cutting cycle; he stated that a “material reassessment” of the outlook would be required to justify additional rate cuts.

Lowering interest rates is a form of expansionary monetary policy that is meant to stimulate economic growth and ward off recession. Currently, the US economy as measured by Real Gross Domestic Product is growing, but it is doing so at a slowing pace. Economic activity in the third quarter was just 2.0% higher than in the third quarter of 2018, from a peak growth rate of 3.2% last year.

In its statement accompanying the rate cut, the Federal Open Market Committee affirmed that the labor market is strong, economic activity is rising, and consumer spending is rising. However, the statement noted that committee members are concerned by weakness in business fixed investment and export activity. In fact, domestic capex spending and US exports during the third quarter were both below the year-ago level. Considering these factors, the decision to cut rates was not driven by imminent recession fears but as a provision to ensure that economic expansion persists.

The Federal Reserve has a dual mandate to foster both maximum employment and price stability. Currently, the Fed’s preferred measure of inflation is running below the target rate of 2%. Overall US Consumer Prices in September were 1.7% higher than the year-ago level. We at ITR Economics expect Prices to generally rise throughout 2020 and 2021, but the current deceleration in the rate of inflation will persist into mid-2020. A rate of inflation below the Fed’s 2% objective is supporting consumer spending, as each dollar stretches further relative to a higher inflation rate. The latest interest rate cut is unlikely to cause a severe pickup in inflation.

For the US consumer and for consumer-focused businesses, these trends are good news. Employment is high, wages are rising, and inflation is muted. Interest rate cuts are stimulative to the macroeconomy and portend lower borrowing costs for households and businesses. Furthermore, we at ITR do not expect a GDP recession or a contraction in retail sales through at least 2021. In fact, we expect the consumer side of the economy to generally outperform the industrial and manufacturing sectors in the near term.

According to Chairman Powell’s statement, the October rate cut may be the last. Consider what a stabilizing interest rate environment may mean for your business. For example, you should evaluate whether you have capital needs that could be financed at today’s low interest rates. A business cycle expansion is coming, and that means an increased need for working capital. If we at ITR Economics can assist in these decisions, please contact us!

Lauren Saidel-Baker
Economist