Fed Lowers Interest Rates Again - What It Means

Santiago Bel
November 12, 2024

This past Thursday, November 7, the Federal Reserve had their most recent Federal Open Market Comittee (FOMC) meeting in which they discuss the state of the economy, and decide to take action and change monetary policy. After the last meeting, the Fed decided to cut interest rates again, by 0.25%, at the rate now sitting between 4.50% and 4.75%. This is the second rate cut this year, with the first one being in September. This is a turnaround from the Fed’s actions to keep interest rates relatively high over the past 2 years while focusing on lowering inflation. For those that are unfamiliar, raising interest rates essentially just increases the cost of borrowing money, discouraging expansionary economic activity, therefore constraining the economy, which is important in times of when the economy is headed in an inflationary direction.

The reason for the change this year is related to the Fed’s “dual mandate”: keep prices steady, and keep unemployment at low levels. Prices have stabilized significantly since they spiked in 2021 and early 2022, and wages aren’t surging like before. At the same time, companies are being slower to hire and expand. With one aspect of the “mandate” taken care of, the Fed’s main concern now is to make sure that economic activity isn’t shrunk too much and make sure that we aren’t heading towards a recession. Lowering interest rates again will hopefully boost business investments as well as motivate people to spend more since there is more reason for them to borrow money now as the cost of doing so has decreased. 

It’s also important to note that though it seems like the Fed made this move right after Trump’s election, the policy is completely unrelated to politics, showing how the central bank operates to benefit the U.S. dollar no matter who is president, and operates independently from who is incumbent. 

Many households feel the impact of lower borrowing costs right away. Though mortgage costs rose above seven percent early this year, they may lower a bit now, giving buyers some relief and potentially motivating more home sales. People that use fluctuating loan terms, like credit card balances or adjustable loans, may start receiving lower interest fees, making paying bills a bit less stressful. However, when the Fed lowers interest rates, banks usually tend to also lower the interest they pay on savings accounts, so some people may earn less. 

Apart from saving money, companies get a boost from lower borrowing costs. Cheaper loans means less pressure when businesses are trying to fund expansion, investment, upgrading gear, etc. For smaller ventures that operate paycheck to paycheck, this policy change could alleviate cash crunches. When the news were announced of the Fed’s decisions, the market quickly took action. Stocks jumped, and bonds climbed. The value of the U.S. dollar also dipped a little bit however as income from American investments compared to overseas ones decreased with lower interest rates being returned to investors. This goes on to show how one small monetary policy move can cause drastic changes rippling through the market and the economy.

However, with the dual mandate responsibility, the Fed needs to be careful when changing directions. If demand for loans jumps too fast, the lower rates may steer us towards inflation again. Keeping rates low for a prolonged period of time may disturb the real estate or stock markets a little too much causing supply shortages and rising prices. Globally, the softer rates can cause money shifts, such as shaking up developing countries who are depending on banking on foreign, more stable currencies than their own. So, the Fed needs to move slow, keeping an eye on growth while making sure the economy doesn’t completely turnaround in a negative direction.

The Fed cutting rates isn’t just a routine. It shows the current state of the United States’ money goals. Each decision made causes ripples outward in our market, shaping and changing how families and businesses spend, save, or invest.