Current Events
Iker Jonker
On the 18th of September 2024, the Federal Reserve - also known as the FED - decided to lower interest rates as inflation is closing down onto 2%. Although this may not fully make sense yet, the implications are massive for the economy therefore it's important to understand what’s going on and what the future impact of this decision and what it might look like.
What does the Federal Reserve do?
The Federal Reserve is the Central Bank for the United States. They monitor and work on the U.S. economy. Using various methods like lowering interest rates, they intend to keep the U.S. economy stable, growing and overall remain healthy. Additionally, they use a large number of resources to conserve consumer (people who buy products/services) safety and community development (Who We Are, n.d.).
Although their goals seem abstract and maybe even irrelevant, they are highly important for the economy to do well. This is mainly due to the stability that the FED provides. Stable economies offer predictability.
This helps people since things like their jobs or expenses won’t change a lot. This allows for people and businesses to take risks like investments which helps the economy grow since more jobs are made. This allows for others to spend more money on commodities like Netflix subscriptions or going out to eat which supports businesses. This repeating loop is what you want in an economy and can only exist with this stability provided by the FED.
How does this tie into interest cuts?
Having reached the inflation rate target of 2 percent, the FED is able to
lower the historic high interest rates since it was a measure used to lower inflation. Interest rate is how much it costs to borrow money. Since it's cheaper to borrow money, more companies will facilitate their growth. This opens more jobs for people to take. Additionally, things like mortgages, loans - if variable - will be cheaper as the interest rates lower. This allows for people to have more disposable income (money they can waste on non-necessities) which helps said businesses. This cycle continues helping both businesses and people since more money is flowing around the economy (Baldwin, 2023).
On the other hand, as former Federal Reserve chair Ben Bernanke said in 2004 while still a Fed governor: "In short, if making monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with a delay to the accelerator or the brake" (FRB: Speech, Bernanke the Logic of Monetary Policy December 2, 2004, n.d.). Bernanke is saying that although we have good estimates, we can only predict with some certainty what will happen so take all the predictions in this article with a grain of salt.
References:
Baldwin, J. G. (2023, May 26). The impact of interest rate changes by the
Federal Reserve. Investopedia. https://www.investopedia.com/articles/investing/010616/impact-fed -interest-rate-hike.asp
FRB: Speech, Bernanke The Logic of Monetary Policy December 2, 2004. (n.d.).
Who we are. (n.d.). https://www.federalreserve.gov/aboutthefed/fedexplained/who-we- are.htm
Very nice article!