Feds in a balancing act
After all the anticipation and market discounting of the consensus view of the Fed lowering interest rates, it finally happened. Somewhat of a surprise, the first move down was a big one-50 basis points or ½%. The Fed also said they expect a couple of more moves down in the Fed funds rate before the end of the year. The total reduction for the year 1%. This is the Feds attempt for a “soft landing”. This is a delicate balancing act and if the Fed can pull it off-lower interest rates and continue economic growth-this would be admirable and economic jiu jitsu. The initial stock market reaction was positive for at least ½ hour. Then markets turned engaging in buying the rumor, selling the news strategy. We often say what matters is not what stock markets do on the day of the Fed announcement but the day after. Sure enough, after a sell off on the day of the announcement, the next day markets soared with some averages setting new records.
The actual economic impact will take a while to filter down to everyday American life. We should see auto loan rates, mortgage rates, and maybe even some credit card rates, student loan rates begin to drop. Mortgage rates have already dropped from their highs over a year ago. On the other hand, 5% US Treasury rates are also gone.
Meantime, we have another familiar Congressional challenge-funding the government.The money runs out October 1 and not surprisingly, the Congress so far has failed to pass any short of legislation to fund the government. The usual solution, a Continuing Resolution kicking the can down the proverbial road will probably be the solution but as the Federal Budget Deficit and the Federal Debt grow to the point where interest on the Federal debt could consume 30% of the Federal budget, pushing out other serious Federal programs. Neither Presidential candidate is talking about the Federal Debt, but economists say both candidates will increase the deficit but Trump’s plan for tariffs and to not tax social security or tips will increase the deficit at a substantially higher rate assuming he is elected and can pass this legislation. Going to be an interesting 2 months!
In the News
Key student loan protection ends Sept. 30, here's what borrowers should know
The Morning: An interest rate cut (nytimes.com)
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