Question

Federal Reserve Chairman Jerome Powell announced the central bank will lower interest rates for the first time since the Great Recession in 2008 to help stave off the possibility of an economic downturn. Federal Reserve Chairman Jerome Powell announced the Fed will lower its target federal funds interest rate by 25 basis points to a range of 2.0% to 2.25%. Powell stated the Fed still viewed the outlook for the U.S. economy as favorable, but the interest rate cut is expected to ensure continued economic growth. He further stated the rate cut is intended to offset weak global growth and trade policy uncertainty. The lower interest rate is also expected to increase inflation slightly to keep it hovering near the Fed’s 2.0% target inflation rate. Powell indicated the rate cut’s overall goal was to sustain the current economic expansion while keeping prices stable. Please answer the following 6 questions using your current knowledge. What effect might this have on the interest rate of a car loan when you finance your purchase of a new car? Does it mean that a house will be more or less affordable in the future? Will it make it easier or harder for you to get a job next year? Why would the Fed use such a policy? Conduct a quick search on the internet, does President Trump agree with this policy? Do you think a recession is coming soon? Why or why not?

Answer 1

1: The decrease in the Federal funds interest rate, may lead to a reduction in the interest rate charged on loans. Hence interest rate on a car loan is expected to be lesser.

2: A house will also be more affordable in future. This will be due to a reduction in the interest rate charged on home loans.

3: It is expected that getting the job will be easier next year. Due to lower interest rates economic activity is expected to boost up. This is due to greater affordability of borrowed funds . The economy should see greater investment in businesses. There will be new investment in projects which will increase employment.

4: The Fed uses such a policy then it expects economic recession. Such a policy boosts economic activity in the country by making borrowed funds cheaper.

5: President Trump agrees that such a policy and in fact, he has been the one to initiate interest rate cuts.

6: A recession seems to be coming soon. This is evident from an inverted yield curve. Inversion of the curve implies that long-term interest rates are expected to be lower than short-term interest rates and this is a sign of recession.