Why the Federal Reserve is cutting rates?
The Federal Reserve met on Wednesday, July 31, 2019 to discuss the impending decrease in interest rates. There were many factors the Fed needed to take into consideration before reaching a decision: The slow global economic growth, uncertainty around trade policies, muted inflation, unemployment at a 50-year low, and more. One thing Jerome “Jay” Powell and the Federal Reserve have made abundantly clear is that they do not take into account political considerations when making policy decisions.
What is the expected total decrease?
The benchmark interest rate is expected to decrease by a quarter-percentage point for a range of 2% to 2.25%. This is the first decrease since the 2008 recession. While they did not tip their hat with regards to additional rate cuts down the road, the Fed stated that they will “monitor economic conditions and would ‘act as appropriate to sustain the expansion.’” (NPR, “Fed Cuts Interest Rates for 1st Time Since 2008”, 2019).
When will all of this take place?
The change will not take place overnight. In fact, “there is even solid evidence that the mere expectation that the Fed would cut rates on Wednesday had already pushed down some of the key rates that consumers pay” (New York Times, “The Fed Just Cut Interest Rates. Here’s What That Means For You.”, 2019). The main thing to keep in mind is that the Fed does not directly control things like car loans, credit card balance, or mortgages. The federal funds rate is directly affected and the remaining borrowing and savings rates that consumers encounter everyday are indirect effects (New York Times, 2019).
What exactly is the federal funds rate?
The federal funds rate is what “banks and other financial institutions charge one another for borrowing” (New York Times, 2019).
What does it mean for Commercial Real Estate?
Lower interest rates could affect real estate owners, investors and lenders as declining rates could spur sales activity as we move toward the end of the year (CoStar, “Fed Cuts Rates as Trade Headwinds Batter Global Economy”, 2019). Commercial Real Estate has “weathered the global turbulence better than U.S. manufacturers and exporters.” However, “many factors are highly local, including market conditions, the quality of properties, the amount of inventory and demand,” it is also important to keep in mind that “prior performance does not guarantee future results” (CNL Securities, “How Rising Interest Rates Affect Commercial Real Estate”, 2019).
Still curious? Check out these links below to read more
https://www.crainsnewyork.com/finance/fed-interest-rate-cut-could-help-keep-city-investment-flowing
https://www.cnn.com/2019/07/05/economy/june-jobs-report/index.html
