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Feds Cut Interest Rate; First Time This Decade

As reported on July 31, 2019, the Federal Reserve cut interest rates by a quarter percentage point. With this widely expected move, the federal funds rate is now at a target range of 2%- 2.25%. Federal Reserve Chairman Powell cited that the Fed is in no rush to continue with easing interest rates, unless warranted. The central bank earlier voted, with two officials dissenting, to cut rates. However, the primary reason for the rate decrease was to cushion the U.S. economy from a global slowdown along with increasing trade policy tensions.

The Fed also announced that it would end the runoff of its $3.8 trillion asset portfolio two months earlier than previously planned. Interest rates—which affect the cost of borrowing for credit cards, mortgages, etc.—are now set to hover between 2% and 2.25% in light of the Fed’s rate cut. With respect to the strength of the U.S. economy: The current ten-year economic expansion is the longest on record, unemployment is at a near-historic low of 3.7%, and the stock market continues to attain record levels. 

The Dow closed July 31 down more than 330 points, or 1.2%, and the S&P 500 slid 1.1%. Analysts said Chairman Powell's comments curbed some of the enthusiasm about multiple rate cuts this year, which had powered the stock-market rally. Powell cited uncertainty in current global trade policies and potentially continued related stress on businesses as a contributing factor to the rate cut. Furthermore, he indicated the rate cut as a “mid-term policy adjustment,” which could be perceived to mean that the central bank has not ruled out further rate decreases. Despite the Fed’s announcement, major indexes experienced a net gain in July. The S&P index has increased 19% in calendar year 2019.  

The July 31 interest rate cut was the most significant reduction since 2008. To help put all of this in some sort of interesting historic context, the all-time low was 0.25% when the Fed lowered the rate to this level on December 17, 2008. In that year and into early 2009, the Fed cut the interest rate 10 times. It did not raise rates until December 2015; before that, the lowest Fed funds rate was 1% in 2003 to combat the 2001 recession. At the time, there were fears that the economy was drifting toward deflation. And for those who like to take a turbulent walk down memory lane, the Fed rate was 4.25% in January 1970 and increased to 15% in February 1980.

Timothy Speiss is Co-Leader of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

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