(The Center Square) – The Federal Reserve’s half-point interest rate cut is meant to stimulate the economy, but a budgetary analyst says this shift in monetary policy also represents an important change in the operating environment for state budgets.
It is the first interest rate cut in four years. Outside of the emergency rate reductions during the pandemic, the last time the Federal Open Market Committee cut by half a point was in 2008 during the global financial crisis.
“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation,” said Fed chair Jerome Powell.
Justin Theal, state fiscal health officer with Pew Charitable Trusts, said one of the most immediate impacts of lower rates will be lower borrowing costs for state and local governments seeking to finance projects.
“A lot of the benefits will be experienced gradually over time in the areas of borrowing and revenue and spending, in particular,” said Theal.
In addition to making new borrowing more affordable, Theal said lower rates could prompt states like Illinois to refinance older, higher-interest bonds to free up fiscal bandwidth for other priorities.
Theal adds that there are some drawbacks on state budgets from a reduction in interest rates.
“I think it is important to note that this shift doesn’t without trade-offs,” said Theal. “Reduced interest income from state’s financial reserves is one trade-off.”
Illinois generated $558 million in interest income during the last fiscal year, an over 50% increase from the year before. There is just over $2 billion in Illinois’ budget stabilization fund, or “rainy day” fund. It is the highest it’s been in decades, but still one of the lowest amounts in the country.
Illinois’s latest budget is the largest spending plan ever by the state. Democratic lawmakers approved more than $1.1 billion in revenue increases, including a tax hike on sportsbooks and businesses, to balance the $53.1 billion spending plan for fiscal year 2025.
