The thought that interest rate cuts by the Federal Reserve is unlikely to do much of anything for your personal economic state. Frankly, it’s unlikely to be a saving lifeline for any business.
The back and forth on whether the Fed will reduce its benchmark federal funds rate — the amounts that banks charge one another to borrow money overnight — is an unending topic of mystery and speculation. Oh, look, the inflation read from the Consumer Price Index (CPI) dropped more than expected. Maybe that means the Fed will lower interest rates. Or the Producer Price Index — the business equivalent of consumer inflation — was higher than expected, so will the Fed hold off on reducing rates or even, horrors, raise them?
The pure amount of information you hear about economics is like a hip-high lake that you wade through, but which is muddy and utterly opaque. An example is analysts at Citi Research predicted that the Fed would, starting in August, make a series of eight back-to-back rate cuts, as Fortune reported early in July, for a total of 2 full percentage points in reduction.
And then, the investment giant Vanguard says that at best the country will see a single cut, maybe in September, and then nothing further in the remaining quarter of 2024.
Everyone is guessing, backed by information that consider worthwhile, but no one know what the Fed will do. The Fed might not know what it will do. They’re worried about cutting rates too soon and watching a sudden rush of purchasing and investments driving prices up again. Or cutting too late and watching the economy tip over into a recession.
Economics is slippery and everyone is doing as well as they can based on what they’ve learned and what they believe. If economics were truly scientific, there would be much more agreement as to what path to take. But it’s not. Much of economics is the observation of correlations and then wondering if they represent some kind of natural law. Often, it’s not.
Say, for a moment, that the rate cuts come. Is that going to provide significant relief to consumers? Not really. From professional conversations I have at times with truly wealthy people, even they aren’t going to do handsprings because the Fed will probably cut a quarter of a percent off rates at a time. Chances are that after a first cut, they will wait for some time to gauge the effect on the economy. A quarter-percent lower financing cost is nice, but it isn’t a make-or-break change. That doesn’t make everything much cheaper. It’s more taken as a promise by investors of an ongoing direction and a degree of certainty that lets them make plans.
When rates go down, as they eventually likely will, it will take time for changes to percolate up to affect credit card rates, car loans, and home mortgages. Again, not a sudden or significant win for consumers.
The point isn’t to depress anyone but to suggest calm deliberation and consideration. If you’re in debt, find ways to work it down. If you want to save money, start doing so, even if it’s only a small amount at a time to start. The more you can get practical, the better a chance you have of making real progress, not hopes that some outside force will better things.
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