In spite of intense pressure from President Trump, the Federal Reserve did not change its key interest rates when it met last. Instead, the Fed reiterated its stance that it probably not hike rates in the near future. The reasons for their decision included low inflation and a strong economy.
Does a Lower Interest Rate Make Sense?
Trump stated that he wanted the economy to continue to strengthen so he urged the Federal Reserve to lower rates in hopes that it would spur greater growth. Some experts, such as Kathy Bostjancic, an economist at Oxford Economics, projects that slashing the interest rate by one percentage point in 2019 will help the economy grow by about one-half of a percentage point in 2020. In order to be fully beneficial, though, businesses would need to be able to find enough qualified workers so they can make more goods and provide more services. Already, however, companies are having a hard time doing that because, at 3.8 percent, the nation’s unemployment rate is the lowest it’s been in close to 50 years.
Potential Backlash From Further Interest Rate Reductions
There is some concern that slashing the interest rate could increase the risk of bubbles forming and popping as they did in 2008. This would probably result because of investors who move money that’s sitting in low-yielding bonds to commercial real estate, stocks and other vehicles that offer a higher yield.
In spite of this, officials from the Federal Reserve didn’t rule out the possibility that interest rates could possibly be cut. Rather than making that decision based on the fact that the economy is experiencing two percent growth, the focus would be worries about inflation that continues to plunge. This could lead to falling prices or deflation. Because this is likely to make consumers wait on before springing for purchases, it could prompt an economic downturn.
Another potential consequence is that a rate cut could fuel a market selloff or a slowdown in material growth. As a hedge against that possibility, there are some economists who think that the Fed will cut the rate again by one-quarter of a percent over the course of the next year or perhaps even longer.
Why is Trump Pushing for a Rate Cut?
There’s speculation that Trump wants the economy to be booming as the elections of 2020 approach. The public’s confidence in the Fed as an independent agency is something that ensures that the agency doesn’t make decisions simply because of what the president wants.
What’s the Bottom Line for Homebuyers?
Potential homebuyers who have put off looking for a home in the hopes that interest rates will fall again should balance this desire with other factors. There is no guarantee that rates will fall any lower and they could still increase if the Fed feels the need to rebalance the economy.