The Top Reasons For and Against an Interest Rate Cut

by | Jul 31, 2019 | Markets

The Federal Reserve hasn’t cut interest rates in nearly a decade.

But that may change, as early as today with the central bank expected to cut a quarter point.  They’ve cited four key reasons for doing so.

One, they’re concerned that weaker global growth and trade war uncertainty are beginning to damage business investment, which could impact hiring and consumer spending.  Two, they’re concerned that inflation may have cooled this year.

And three, officials have said they are cutting to act pre-emptively against a downturn.  

However, not everyone is thrilled with the idea.

Goldman Sachs’ chief economist Jan Hatzius doesn’t believe the data supports a rate cut, for example.  “We’re seeing the economy still grow at a pretty good pace, probably with above-trend payroll growth. And while the inflation numbers are below target, I don’t think it’s a big gap,” he said, as reported by MarketWatch.  “I don’t think it’s necessary to ease policy here. Because the unemployment rate is 3.7%. Payrolls have averaged 170,000-plus over the last three to six months, and the weakness in the manufacturing indicators actually seems to abating. So at least the early numbers for July suggests things are stronger.”

Boston Fed president Eric Rosengren said, “I think we should wait,” as noted by CNBC last week.  “So, given that the economy is quite strong, given that I do think that inflation is going to be very close to 2%, and given that the growth in the economy is satisfactory, I think that’s an environment where you don’t have to take a lot of action.”  

Kansas City Fed President Esther George told The Wall Street Journal that she doesn’t see the case for a cut in interest rates this month.  “When I look at the current settings for monetary policy, my own outlook suggests we will continue to see growth in the economy around or slightly above the trend rate of growth, we see an unemployment rate at a 50-year low and continued job gains as recently as the most recent employment numbers.”

It’s a wait and see at this point. 

But at the moment, it appears the Fed is ready to cut by at least a quarter point to soothe potential trade war concerns.