Jerome Powell, chairman of The Federal Reserve, seemed to suggest in testimony on Capitol Hill that a reduction in the interest rate is on the way, perhaps even as early as the end of July. This comes after four increases to the interest rate in 2018, despite President Donald Trump regularly bemoaning such increases, fearing they’ll be bad for the stock market and for sustained economic growth.
Powell’s testimony all but ensures that a rate dip is on its way, and as he stated in his prepared testimony before the House Financial Services Committee, it’s largely to stabilize what could potentially be a volatile economy due to ongoing trade tensions, the U.S. economic outlook and the overall global economy.
A lower interest rate is both good and bad, but certainly for the reasons Powell appears to be ready to slash it, it’s a little bit alarming. Still, there are things to like about this looming interest rate cut and things that are more reason for concern.
Let’s take a look at everything that you should be aware of in the weeks (days?) leading up to this expected cut:
- It’s a good time to take out a loan: Any time that the interest rate goes down, it’s good news for consumers who are looking to buy a home, take out an auto loan or borrow any other sum of money. On a 30-year, fixed rate mortgage loan, for instance, a 0.25 percentage drop in the interest rate could save consumers thousands of dollars over the course of the loan in the long run should a consumer take out a loan following the dip. The move will even behoove short-term interest rates (i.e., credit cards) as well as floating rate loans, as consumers would see decreased monthly payments as a result of it. Keep in mind that the higher the interest rate, the more that a consumer would pay in interest fees long term. Bottom line: When interest rates are lowered across the board, it’s a good time to borrow.
- It means the economy might be stalling: The biggest reason why the Fed is likely to decrease the interest rate is because there’s worry that the economy is stalling, and it’s a motivator to get consumers who are in a position to borrow to act on it. That’s the concern with this looming interest rate cut — it’s likely not being done out of the goodness of the Fed’s heart, it’s being done because there are signs that the economy as it stands now is slowing, and this is an attempt to keep it humming along as trade and other global economic factors get worked out. The Fed usually decreases the interest rate when it wants to encourage consumers to buy, and increases it when the economy is strong and it wants to balance things out and control inflation. The economy has been on a growth trajectory for the past 11 years, and the Fed is poised to do what it takes to sustain this momentum. That’s what’s concerning about this likely action.
- Wall Street loves it: A decreased interest rate is likely to encourage more activity, so it’s easy to see why Wall Street is cheering Powell’s remarks. In fact, after he gave them, the Nasdaq Composite soared to great heights.
- Americans with current fixed-rate interest rate loans are out of luck: While there’s always the option to refinance, current consumers that are already in a fixed-rate loan wouldn’t benefit much from an interest rate decrease. This is largely because their loan already exists, so the interest rate was set at whatever the going rate was at the time they were approved for it. Like we said, if the decrease is significant enough and their house is up there enough in cost, it might make sense to take advantage of a lower rate to refinance to a better interest rate and lower monthly payment. Generally, however, these consumers are usually best to stand pat.
Do you stand to benefit from a (likely) interest rate cut at the end of this month?
Regards,
Ethan Warrick
Editor
Wealth Authority
