When the Fed cuts rates, the world economy notices. It typically provides a mirror for the current state of things and a taste of things to come.
Here are four reasons the Fed’s recent quarter-point cut is putting a song in the heart and a spring in the step of businesses and individuals.
1. Business spending
Lower interest rates mean cheaper loans for businesses to spend on development. Historically, lower rates have helped spur economic activity. If the Fed keeps bringing rates down over the next year, this could ease up borrowing for businesses over a longer period of time to help extend the current economic growth cycle.
2. Market returns
Historically, rate movements and market returns have stayed on opposite sides of the see-saw. When rates trend down, markets trend up. As rates rise, markets stagnate. If this rate cut is just the beginning of a longer term strategy, the market could be on the verge of something great.
3. Rates have been rising since the end of 2015
While rates are still at generally low levels historically speaking, four years of consistent rate hikes was starting to suffocate borrowing by individuals and businesses alike. The rate cuts signal an easing of rate hikes – a seen as a huge positive for borrowers.
Additionally, as rates rise, they can decrease the value of bonds and CDs that were purchased under previously lower rates. As such, a rate hike freeze helps maintain the value of some of these investments.
4. Potential for improved trade
An interest rate cut could result in a slight devaluation of the U.S. dollar, which could open the door to more foreign investments and more purchases of American goods, improving trade overall.
Keep in mind, a strong U.S. dollar is likely better for the American economy in the long run. But for now, this could lower prices of U.S. goods on the international scale and help breathe some life into a near-comatose trade situation in the U.S., due in part to the strong dollar and trade issues with China and other countries.