The Federal Reserve claims to be making this cut in order to respond to business developments and a slowdown in exports. Inflation remains below the Fed's 2% target, allowing the target to be lowered without jeopardizing price stability.
In the Fed’s language, it now say that the Federal Reserve will monitor incoming information as it assesses the appropriate path for the Fed funds rate going forward. This change in language could be taken to indicate that these three rate cuts have been a typical mid-cycle adjustment that has now reached its end.
Clearly Jerome Powell and his colleagues have been motivated to make this mid-course correction to appease a President trying to help his real estate buddies and to proactively address a rate curve inversion. Barring a dramatic and pronounced turn towards a recession, the Fed’s next move should come in 2020 and be to increase rates in order to normalize the cost of capital.
This time last year, everyone was getting very excited about savings rates moving well above 2%, about 1-year CDs at 2.85% and above, and 5-year CDs at 3.50%. Those with cash were finally finding risk-free opportunities for their savings that matched the dividend yields that they could get from stock holdings in major industrial companies.
My, how times have switched back again quickly!
In short order, savings rates have been falling as the Fed has now cut rates twice this year. While the Federal Funds rate is now at a target 1.75% to 2.00%, some savings rates are still as high as 2.40%. But, estimates are for as many as two more rate cuts this year as the economy continues to slow and impeachment becomes heated. 2-year US Treasuries are now yielding below 1.40%. If are still excited about savings rates, don’t get too excited because if the Federal Reserve does anything like what economists and market observers are predicting, they could go much lower in the months ahead.
In this environment, if there is anything to get excited about it is still CD rates. BestCashCow is still showing several online banks offering 1-year CDs at 2.50%, with 2-year and 3-year CDs as high as 2.60%, and 5-year CDs as high as 3.00%. You may even find higher rates at banks and credit unions.
We’d be careful not to put too much in long-term CDs. However, as 2020 is going to present a rather uncertain political and economic environment, locking in an interest rate for the next year on money that you know you won’t need makes sense.
The Federal Reserve acted today to lower the target Fed Funds rate by a quarter point. This follows the July 31 quarter point reduction of the rate. The Fed Funds rate had stood at a post-crisis high of 2.25% to 2.50% earlier this year, but due to Presidential harassment it now sits at 1.75% to 2.00%.
Jerome Powell’s move was much expected, yet it invariably raises questions. The Fed’s mandate is to fight inflation and to maintain interest rate stability. Lowering the rate while inflation is beginning to perk up debases the value of the currency (hurts savers by lowering savings rates) and lowering the rate now also impairs its ability to maintain financial stability in the event of a real crisis. It is unclear exactly what Powell is afraid of now and what is prompting this action. Core CPI is strong, the economy is producing at capacity and the stock market is at an all time high. While the dollar has strengthened against other major currencies, it remains dramatically weaker than it was in 2001 and 2002 and the Fed’s mandate is not to weaken the currency. Therefore, either Powell is seeing real signs of a slowdown due to the trade war with China and acting preemptively, in which case we should be worried, or he is responding to political pressure in which case a dangerous precedent has happened.
Along with Jerome Powell, 5 other Fed members were on board with the action. 3 Fed governors dissented with one, James Bullard, dissenting because he wanted a full half point cut.
In the Fed’s statement, it said that the outlook is uncertain and the Fed continues to monitor the situation and will take further action as required. The outlook is always uncertain and the Fed always monitors the situation. The prevailing view of Wall Street going into this action was that the Fed would cut again when it concludes it next meeting on October 30. However, 7 members see the need for another cut and 5 do not, leaving the Fed more divided than ever before and leaving uncertain what action the Fed will take in October.
Jerome Powell himself may not even get to October as Fed Chairman. There is an anxious man who lives and works at 1600 Pennsylvania Avenue who wants the Fed to act much more quickly and aggressively. Some believe that his personal business interests require a quicker lowering of rates in order to stay afloat (incidentally, real estate prices in New York are really coming off highs quickly now). This fellow is capricious and may act now to fire Jerome Powell, and even to replace him with Jim Cramer. Powell has said that he will not resign his post; a constitutional crisis may be coming.
