It’s the million-dollar question on everyone’s mind: What will happen to the economy after the Fed slashes interest rates for the first time in four years?
Big cuts like the latest one of 50 basis points have not always been good for the economy, reported Investopedia.
“On all the recent occasions when the Fed has accelerated up to 50bp cuts, bad things have then happened,” Deutsche Bank analysts wrote following the Fed’s move, per Investopedia. The analysts were quick to note, however, that the large cuts were not necessarily associated with what followed or at least not the exclusive cause of what followed. “Correlation isn’t causation, and it’s hardly like the [Great Financial Crisis] only happened because the Fed opened with 50 bps.”
Still, it’s unclear if the Fed will manage the “soft landing” it’s been hoping for, and we’re far from out of the woods yet.
The Wall Street Journal reports on how the Fed’s move on interest rates doesn’t control or impact all borrowing, with some rates having even increased since the cuts. Here’s the start of the story:
The Federal Reserve is finally cutting interest rates. One key gauge of borrowing costs has been going up anyway.
Yields on longer-term U.S. Treasurys have ticked higher since the Fed approved a 0.5 percentage point rate-cut last week. The yield on the benchmark 10-year U.S. Treasury note, which helps set interest rates on everything from mortgages to corporate bonds, settled Friday at around 3.73%, up from 3.64% the day before the Fed’s move.
The climb is a reminder that the Fed doesn’t have complete control over borrowing costs in the country. The central bank manages short-term rates that banks charge each other for overnight loans, which shift costs on credit-card debt and other types of floating-rate loans.
But rates on a lot more debt are driven primarily by swings in Treasury yields. Those are set by where investors think the Fed’s short-term rates will go in the future, rather than where they are now.
Treasury yields are still about a percentage point lower than they were earlier in the year, when rate cuts seemed more uncertain. But there is no guarantee that they will fall any further if the economy remains stable, potentially frustrating potential home buyers and other borrowers hoping for bigger declines.