The Federal Reserve lowered its target for the Fed funds rate by another 25 basis points last week. But why should you care?
Although the U.S. economy is still growing at an above-average pace, it has been slowing. Employment growth has decelerated, and while layoffs remain low, the number of available opportunities for workers is dwindling.
By lowering the floor on short-term interest rates, the Federal Reserve is working to slow this negative momentum and prevent further deterioration of economic conditions. Lower rates make it easier for households and businesses to borrow for consumption or to invest in projects that might not otherwise be profitable. Increased consumer spending and investment drive job creation and economic growth. Sectors sensitive to borrowing costs, like banking, construction, real estate, and manufacturing, are often the first to feel the benefits of declining interest rates.
Here’s the risk:
A red wave resulting in GOP control of both the House and Senate means that any policy proposal in the first 100 days of the Trump presidency could easily and quickly become law. This much power comes with enormous responsibility. If financial markets sense that policy changes could be inflationary, borrowing costs could rise, and the Fed may hold off on further rate cuts. A shrinking tax base coupled with higher deficit spending could push yields higher. Conversely, if the new leadership focuses on improving the regulatory environment, removing business barriers, collaborating with state and local governments to reduce barriers to housing construction, and addressing the U.S. fiscal imbalance, productivity growth could increase, inflationary pressures could ease, and the economy could remain on a sustainable growth path.
It will be interesting to see how a federal government choosing to prioritize current spending over critical investments, combined with persistently high fiscal deficits, will affect inflation and interest rates in the year ahead. I’d love to hear from you – connect with me on LinkedIn and ask me anything.
The 10-year Treasury yield, a benchmark interest rate for many financial products, ended the week lower despite an initial surge following the election results. Heading into 2025, this new government – not the Federal Reserve – will be in the driver’s seat, with the power to shape the economy.
Elsewhere in the economy:
The first inflation reading for October will be the main event this week. Although falling energy prices dragged down headline inflation measured by the consumer price index (CPI), core inflation accelerated for 3 consecutive months. At the same time, inflation measured by the producer price index (PPI) eased more than expected falling to its lowest level since February 2021. CPI is a measure of the total value of goods and services consumers have bought over a specified period, while PPI is a measure of inflation from the perspective of producers.We’ll also get an update on retail sales. Last month, retail sales increased more than expected, rising 0.4% in September, up from 0.1% in August. Core retail sales increased 0.7%. This was a positive sign that as inflation cooled, household finances strengthened.
