Will The FED Cut Rates This Summer?
The Federal Reserve is an organization which sets monetary across the nation, setting the baseline rate banks can borrow money from each other, which, in turn, directly affects the interest rate most companies and individuals pay on loans whether business or personal.
The FED raises rates or lowers rates to curb inflation, protect the value of the dollar and by doing so safeguard the economy. During times of inflation the FED will raise rates to slow the economy, raising the rate to borrow money leads to less business activity and with the cost of doing business higher the American consumer and corporations will slow economic activity, such as buying houses, and hiring. All of which can affect your small business in ways both large and small.
During times of lower inflation, the FED will lower rates to perk up spending and boost commerce. It dances along a fine line of timing on when to raise or lower rates and the FED wants to see concrete data after taking an action on which direction the economy is heading before adjusting rates again. Move too early and lower rates after a successful round of rate raises in an effort cool the economy and all that work would be for naught forcing a restart of the process to quell inflation.
That is where the FED currently sits, however with rates still high and pretty much unchanged from the beginning of the year the latest economic readings point to an environment where rate cuts should be imminent.
Inflation slowed in May to 0.1% and the Labor Department’s May survey found 700,000 fewer people with jobs than in April, a clear sign of economic slowdown and a particular strain on small businesses. The prime interest rate has stayed stubbornly high at 7.5% also credit-card interest rates are above 20%, a record high. The mortgage rate is prohibitive, driving up housing costs and rents. Monthly mortgage payments are at a record high, and builder confidence is down.
The Central European bank and Bank of England have cut rates in consecutive months and the global economy is in a deflationary environment for manufactured goods in part due to the US – China trade negotiations with China selling most of its goods across the rest of the world at a discount the time the US has been reluctant to buy them due to higher tariff costs.
So why hasn’t the FED lowered rates? It’s primarily because of the “limits to growth” models it looks at which take into account the preponderance of the US economy’s ability to grow. According to their internal data readings the US has a low potential growth rate leaving the FED chair and supporting cast to continue to pump the breaks.
Some economists argue that the FED is behind the curve and the overly conservative monetary policy is harming small businesses. They aren’t wrong, higher borrowing costs and lower consumer confidence indeed has its affects regardless of the industry a company is operating in.
How long will rates stay high? It rests of the FED and their internal metrics and members to determine any changes in monetary policy. While there may be outside pressure from economists with different points of view and indeed President Trump, the FED is an apolitical and private organization and continues to work to remain so, to some of the public’s chagrin.
Will rates come down? The FED has said it aims to cut rates closer to Q3 of this year, but with the overall green light for them to do so sooner expect some relief to come before the summer end.
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- Vince Calace
Founder - Venture Business Development