The Federal Reserve made their decision yesterday to cut interest rates by 25 basis points, which was the first time since the financial crisis in 2008. This is a relatively minimal cut compared to the 225 basis point elevation in rates between December 2015 and December 2018. The interest rate now sits at 2% down from 2.25% in the hopes that it will combat a possible slowdown in the US economy. 

However, does this cut signal trouble ahead followed by a series of cuts? The Fed stated that they will be attentive to the economy and the incoming data and “act as appropriate to sustain the expansion”. Regardless, the job market still looks solid with a 224,000 increase in jobs according to the June jobs report, which only slightly increases the unemployment rate to 3.7%. Nonetheless, in the case that we do see a sequence of cuts in the future, concerns have risen due to the already low interest rate. If the Fed is put in a position where they must counter a possible recession, this could be more difficult with rates as low as they currently are. 

The Fed also decided to end its process of shrinking its balance sheet, also known as quantitative tightening, two months early. Therefore, the Fed will now maintain the current asset levels, with payments from non-Treasury holdings reinvested in Treasuries in an effort to reduce the amount of debt and mortgage-backed securities held by the Fed. 

The Fed’s next meeting will be held on September 18, so tune in to assess the state of the economy and determine what the Fed’s next moves will be.

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