Yesterday, the FOMC cut rates for the first time in almost 11 years, but the markets wanted more. Investors expected this cut to happen and the stock market responded favorably, continuing to move higher from June and into July. However, post this historic cut in rates, Fed Chairman Powell alluded to no further cuts being needed for the foreseeable future. This one and done action was received negatively by investors and the last day of July finished deep in the red.
Post this move, investors and economists are scratching their heads as to why this action was done at all. The economy is quietly moving along, with recent GDP data showing 2% growth, inflation is steady at 2% as well, and unemployment remains near a five-decade low, at 4%. You could say this is a Goldilocks moment: neither too hot nor too cold.
At the post cut press conference, Chairman Powell discussed his reasons for his action. The rate cut serves as a means to keeping the economy growing, especially as the global economy has been slowing. The other part of this action was to continue to ensure companies can grow. Growth leads to more workers being needed; and more demand for workers should lead to wage growth. If there is a need for more workers and a company cannot fill those positions, they have to raise wages to appeal to candidates.
Currently, the economy remains in good shape, but there is concern that slowing global growth will impact the United States’ economy. Powell’s job is to help insulate against that risk and rate cuts help. The key is to not cut them too low to cause higher inflation.
For now, expect items with floating rates to have lower interest payments. It will not be much, but it is something. Credit cards, mortgages, car loans and even student loans will be affected by this move in rates—to the benefit of you the consumer most likely. And if Powell does see more risk on the horizon, you could expect another cut as well. Like Goldilocks, the economy does not like things too hot or too cold. But what it dislikes even more? BEAR Markets!