After many months of speculation, the Federal Reserve not only cut rates, but their initial cut to the Federal Funds Rate was a full 50 basis points, as opposed to the highly anticipated 25 basis points.  The stated reason to lower a full 50 basis points was to be preemptive against any significant slowdown in the economy.  Many, however, questioned the aggressive cut especially this late in an election year.  However, Chair Powell defended the decision to start big, was  made for the right reasons, and that it was not politically motivated, nor did the Fed bow to bullying by the market.   Powell insisted it was a decision dictated by the data, including the July employment report, released just a day after the July meeting.  Powell stated “If we had seen that report before the decision in July, we might have started cutting then.”

During his press conference, Powell noted Fed concern about the job market was about more than the rising unemployment rate, more particular the Fed is additionally uncomfortable with the recent slowing pace in the job growth numbers. 

Judging from Powell’s press conference, the decision to quickly start easing  stems from a rapid shift in balance of risks.  His statement goes on to further state that the Fed considers risks to both sides of the mandate to ensure they are balanced.  But this statement was issued after the rate decision was made, so we cannot assume they are balanced after the half-point rate cut. 

Going forward we need to closely watch data, growth, employment, and inflation to anticipate how it will play out.  At the moment, the FOMC median target Fed Funds Rate at the end of cutting is

2.75%-3.00% but there is a range, with the high at 3.75%-4.00% and the low 2.25%-2.50%.  That range will tighten up as more data comes to light and the clearer picture emerges.  As a reference point, the National Prime Rate is generally 300 basis points over the Fed Funds Rate, so the National Prime Rate is expected to drop to a range of 5.25%-7.00%.   These are low rates on a historical basis. 

The key for consumers to remember is that the yield curve has been inverted for the past couple years (short-term rates higher than long-term rates).   Short-term rates are falling and long-term rates are dropping more slowly.  The net effect is a normal upward sloping yield curve.  Those staying short with their CD purchases will find that the lofty rates are declining significantly.  If you are looking for higher yields, it make sense to seek and capture longer-term rates while they are still at higher levels.

Although the stock market has continued to perform very well, any significant negative economic events will impact and cause the market to react in a very aggressive manner, given the rising prices across the board this past year. 

From a savers standpoint, it has been a long time finding rates that make sense.  Now is a good time to lock those rates in.

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