Jerome Powell, the Federal Reserve Chair, gave Americans a glimmer of hope after his speech, saying that the time has come for the government body to adjust its interest policy and make a federal interest rate cut.
What does this mean for Americans’ future, and how will it affect the prices of items, properties, loans, and mortgages in the coming months?
What Did Jerome Powell Say About Interest Rates?
“The time has come for policy to adjust,” Jerome Powell, the Federal Reserve Chair, said in his highly anticipated keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming. In his speech, the chairman laid the groundwork for the upcoming Federal Reserve interest rate cut that will take place in September later this year. However, he has not yet given a clear indication of the pace of these cuts. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.
Instead, he focused on explaining why the government body increased the interest rate from March 2022 through July 2023. He noted that since inflation is reducing, the Federal Reserve can now focus solely on reducing interest rates in the country. He also noted that the Federal Open Market Committee (FOMC) is fully committed to demonstrating its commitment to “restoring price stability” in the country.
What Does a Federal Interest Rate Cut Mean?
The federal interest rate is the rate banks charge each other when lending money overnight to meet the federal reserve requirement. When the Federal Reserve cuts interest rates, it means that it is reducing the federal funds target rate. This also means that a good number of interest rates will reduce significantly, as they all use the Federal Reserve’s target rate as a reference point for their own rates.
Therefore, if the Federal Reserve lowers interest rates, borrowing money will be significantly cheaper for borrowers, improving consumer spending and business investment. Moreover, interest rates on basic amenities and necessities such as car loans, mortgages, and credit cards will also be lower.
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Why Will the Federal Interest Rate Change?
The Federal Reserve chair also gave reasons why the government body is going to cut interest rates soon, noting significant changes in inflation and the labor market. Powell said, “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic. Supply constraints have normalized. And the balance of the risks to our two mandates has changed.”
Powell also said that the Fed will do everything it can to ensure that the country’s progress on inflation continues and the labor market stays progressive.
How Does the Fed Adjust Interest Rates?
The Federal Reserve adjusts interest rates using many different tools, causing the changes we see in the market. Before the country went through a financial crisis, the Fed influenced interest rates by adjusting the quantity of reserves in the banking system. This kept the federal funds rate around the rate set by the government agency. Now, the Federal Reserve controls the interest rate most commonly through “open-market operations.”
This involves the Fed buying and selling Treasury securities in the open market. When the government body buys these Treasuries, it will pay the seller and, in turn, increase the reserves in the banking system. The more bountiful banks’ reserves are, the more money will be available to loan to people, further surprising the federal funds rate. However, when the Federal Reserve does the opposite and sells securities, the reserves in the banking system reduce, raising the fed-funds rate.
What Is the Latest Fed Policy Regarding Interest Rates?
From March 2022 to July 2023, the Federal Reserve increased rates 11 times to slow down inflation. However, since July 2023, the Fed has kept the rates steady at 5.25%—5.50%. Thanks to the recently stable rates, citizens have been feeling some relief in the last few months.
Therefore, many Americans anticipate the agency’s decision in September when the Federal Open Market Committee (FOMC) meets to cut rates further.
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Unemployment and the Federal Interest Rate Cut
Powell’s speech comes as the Federal Reserve notes that the inflation rate is at a good point, drifting back to the 2% target that was intended. According to Fed data, the inflation rate is currently at 2.5%. A year ago, it was at 3.2%, a significant drop from 7% in June 2022.
On the other hand, the unemployment rate has recently climbed to 4.3%, causing worries about a possible recession. Jerome Powell associated the rise in unemployment with the large number of people joining a workforce that is not hiring as much, noting that it is not synonymous with a deterioration of the labor market.
The Goal of the Federal Interest Rate Cut Meeting
The Federal Reserve is holding its interest rate meeting on September 17th and 18th to cut the current rates by at least 0.25 percentage points, as experts predict, or even more. Since Powell did not reveal the exact figure, analysts can only make Federal interest rate cut forecasts.
After the speech, Stephen Brown, the deputy chief North American economist at Capital Economics, said, “The lack of any guidance suggests that Powell is keeping his options open.” After the meeting, the Fed interest rates chart will be analyzed to see how it will impact the economy in the future.
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