The Feds made the biggest single cut in the interest rate in more than 10 years and what happened? Well, according to an article in the New York Times, the markets “rallied for about 15 minutes, but by late Tuesday night, stocks were lower and bond yields had plummeted to previously unthinkable lows as investors sought a safe place to park their money.” The markets tumbled.
What was their plan?
What did they hope would happen? It seems they are trying to protect the world from the coronavirus and its effects on the economy.
Further, in the Times article, Fed Chair, Jerome H. Powell said, “We do recognize that a rate cut cannot reduce the rate of infection, it won’t fix a broken supply chain. We get that– we don’t think we have all the answers. If anything, containing the longer-term economic fallout may necessitate preventive actions that will weigh on near-term economic growth, like restricting air travel, closing movie theaters, shuttering factories and quarantining workers. China the initial source of the outbreak, has engaged in those types of restrictions, hurting its economy temporarily but enabling it to slow the virus’s spread.”
A different post from the New York Times said the Federal Reserve’s rate cut of half a percentage point had “momentarily delighted the stock markets. But investors soon resumed fearful selling amid the realization that cheaper money is of limited use in combating the crisis. Easier loan terms will not restart production at factories whose workers are being kept home to avoid getting or spreading the illness.”
The media coverage, the quarantines in China and other countries, the fear of travel, along with disruption of supply chains have definitely caused the current volatility in the markets. However, it is not comparable to the 2008 financial crisis, which was the last time an emergency 50-basis point rate cut was made by the Feds.
According to Treasury Secretary Steven Mnuchin, “This is going to have an impact on the short-term in the economy.”
What does the rate cut mean for you?
This is how a post on Business Insider simplified it. “Interest rates do a lot to encourage spending and saving — when rates go down, consumers are more likely to spend rather than save, and inject more money into the economy. This interest rate influences all the rest — when it’s cut, borrowing becomes cheaper and saving becomes less lucrative to encourage spending.”
“Greg McBride, chief financial officer at Bankrate told Business Insider, “You need savings for unplanned expenses no matter what. In fact, if interest rates are falling, I’d argue that’s even more of an incentive to boost your savings. Because if the economy rolls over, you want to make sure you’ve got plenty of money saved.”
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