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Fed cuts rate for first time since 2008, markets rattled

Fed cuts rate for first time since 2008, markets rattled

In its fifth meeting of the year, the Federal Open Market Committee voted to reduce its federal funds rate by a quarter percentage point. The decision to bring the rate to a range between 2 and 2.25% was the first lowering of the benchmark rate in over a decade.

The motivations behind the rate cut were also newsworthy, given most indicators of the U.S. economy are strong and the central bank has a generally positive outlook. Chairman Jerome H. Powell said the reduction is a hedge against what go could wrong in the future, citing intent "to insure against downside risks from weak global growth and trade policy uncertainty" in his opening statement announcing the decision

Powell, facing reporters, would then go on to describe this cut as an adjustment, according to CNBC, and not meant to precipitate a change in course that targeted further decreases. Still the FOMC statement left the door open to more rate cuts if appropriate. "Muted" inflation and "soft" business investment were identified by policy-makers as downward pressures, even though job growth continued to trend up. 

Despite expecting a rate cut of 25 basis points, markets fell on the mix of positive and negative signals from the Federal Reserve. Investors had begun pricing in multiple rate cuts for 2019, but the one-off nature of this decrease seemed to rattle them. A sell-off began as Powell spoke. The Dow Jones Industrial Average shed 300 points by the end of the day, according to MarketWatch.

The Fed also announced that it would end quantitative tightening two months ahead of schedule. The Fed bought Treasurys and mortgage-backed securities as a way to help stabilize the crisis-era economy, along with cutting rates. This was separately known as quantitative easing, used to increase money supply. By 2017 the Fed began allowing those assets to roll off its balance sheet, which it will now resolve to hold steady.

Consumers can benefit from lower interest rates

The last time the Fed cut its benchmark rate was December 2008. While consumers enjoyed interest rates near zero in the time since, the Fed began raising rates in 2015. When that happened, the interest rates that banks and other lenders charge went up as well.

The decision to cut the federal funds rate may have an impact on consumers. The interest rates they are quoted for personal loans, credit cards, mortgages, auto loans and home equity lines of credit are tied to the Fed's rate: When it goes up, borrowing interest rates go up; when it goes down, they go down. 

For instance, if you have an adjustable-rate home loan, your interest rate may fall the next time it is rebalanced. The rate cut could further incentivize household spending, which the Fed noted was already growing.

Lower rates could be the opening many Americans look for to take out cost-effective personal or business loans, like mortgages. Want to learn more about that process? Contact The Federal Savings Bank today.