The Fed Left Rates Alone, For Now, But Cuts Look To Be Fast Approaching

The Fed Left Rates Alone, For Now, But Cuts Look To Be Fast Approaching
Theodora Lee Joseph, CFA

3 months ago2 mins

What’s going on here?

The Federal Reserve (the Fed) kept rates where they are, but forecasts of speedier-than-expected rate cuts sent investors’ tongues wagging.

What does this mean?

The federal funds rate dictates how much banks charge each other when they borrow money. And that, in turn, decides the interest rates they use to charge customers. So in other words, it’s the Fed’s main weapon against inflation. At the last meeting on Wednesday, the central bank unanimously decided to keep that essential rate where it is, buying it time to see how the current level affects inflation and the economy in the weeks to come. But that pause may not last long: the Fed’s now anticipating three cuts in the next year. That’s because US inflation is calming down while unemployment holds steady, giving the central bank room to pull down the rates that are stifling the economy.

Inflation eases without rising unemployment

Why should I care?

For markets: The best day ever (almost).

That prospect of rate cuts has investors pricking their ears up. Businesses can borrow money for less when rates are manageable, meaning they can invest more into operations and maximize profit. Plus, low rates decrease the discount rate used to value stocks, making them look more attractive in the present day. So with investors practically rubbing their hands together, it’s no wonder Bloomberg reported that Wednesday hosted the biggest asset rally on a Fed announcement day for nearly 15 years.

Fed new dot plot

The bigger picture: Hard luck, Europe.

Lower rates make it cheaper for both businesses and everyday folk to spend money, which means more much-needed cash flooding the US economy. And while that doesn’t rule out a recession, it does make one a lot less likely. But it’s not an easy decision to make: central banks need to be sure that inflation has calmed before loosening up. That’s why, wary of prices’ tenacity, the Bank of England and European Central Bank both left rates untouched on Thursday.

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