The Fed has cut interest rates for the third time this year due to stagnation in the economy consolidated with a slower US and global economy and a seemingly relentless trade war. In late October, rates were cut by 0.25% to 1.5% from a prior 1.75%.
According to Jerome Powell, the Federal Reserve Chairperson, it is unlikely that rates will be cut further due to stable economic growth and a relatively strong jobs market in this period of economic expansion.
The purpose of cutting interest rates is to artificially stimulate the economy so that this current period of economic expansion can continue. By lowering the financial costs through cutting rates, borrowing and investing would be theoretically encouraged. But cutting interest rates is a very risky game.
With lower interest rates comes higher inflation. And if these rates are lowered too much, there may be too much inflation and growth. As a result, this can end up destabilizing the economy while simultaneously decreasing purchasing power.
However, interest rates have been cut before. For example, quantitative easing, which is the lowering of interest rates in the beginning of a recession, occurred in the 2008 recession. The problem with this is that if the rates get too low, the economy tends to stagnate in growth.
Powell also stated that interest rates will probably not be raised in the near future. If this rate continues on a downward trend, then it is possible that economic stagnation will occur.
The state of the economy continues to be mixed. Job numbers and household spending continues to hold steady, but business exports appears to be getting weaker. Additionally, GDP growth last quarter was 1.9%, which is far below the Trump administration’s goal of 3.0%.
While cutting rates may be increasing economic growth to some degree, the economy is still showing signs of slowdown. For example, consumer spending is still going down. So, the current period of economic expansion might not last for much longer.
