Will the Federal Reserve’s decision to cut interest rates by 50 bps turn out to be better than one can imagine?
Want to know what a bold move looks like? Then read along. The Federal Reserve made a bold yet puzzling move by announcing a 50-basis point cut in interest rates last month. This decision is beyond aggressive, although it has caused some excited buzzing, it also has some people feeling nervously curious. If you have a wallet, and care about the economy, then this decision will affect you, and should catch your immediate attention.
By lowering the interest rates, the feds are changing the tempo of the economy by making the action of borrowing money more accessible. Cutting interest rates by 50 bps is like drinking a strong cup of coffee. To elaborate, a strong cup of coffee gives a human a boost of energy, meanwhile a 50 bps interest rate cut gives the economy a boost of activity. If you have ears, then you must have heard a saying that goes along the lines of almost everything has its pros and cons, and this bold move by the feds is no exception.
The pros of this move is that the economy will get a boost due to the borrowing costs being lower encouraging consumers and businesses to take loans. For consumers, this will allow them to buy expensive items like homes and cars. Meanwhile, for investors, cheaper loans will encourage them to buy stocks, which can raise the stock market, and overall help the economy. On a personal note, I’ve seen my investment portfolio increase significantly since this bold move was announced. The interest rate cut will not only help investors and consumers, but it will also help businesses. The reason for this is because consumer spendings will increase due to lower rates, and cheaper payments; this happens because more disposable income will be available to spend on goods and services on both a local and national level. The primary negative effect is also crucial to point out – when the demand for goods and services exceeds the supply, costs can increase. As a result, inflation can occur.
Like businesses and investors, high schoolers can benefit from this interest rate cut because when interest rates decrease, the used car market sees significant changes. So, imagine this, you’ve been on the lookout for a used car for a month, but it was out of your budget. Now, thanks to the rate cut, prices will drop, and used cars will be more affordable.
Economically and historically speaking 50 bps cuts happened only in 1987, 2001, 2008-2009, and 2020 . If you are like Bobby Fischer, and notice patterns not only in chess, but also in real life whether they’re “good” or “bad”, then you will notice that all these years were marked by major economic events, and spoiler alert, these events weren’t good. In 1987, the rate cut helped stabilize the markets in the short term, but it also led to a lot of concerns regarding inflation, and it made the market a place of volatility.
Meanwhile, in 2001, the rate cuts were aimed to stimulate the economy, and they did, however it led to excessive borrowing and risk-taking, and was also used as the scapegoat for the financial crisis that happened in 2007-2008, when financial institutions and housing markets crashed.