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The Federal Reserve Cut Interest Rate by 25-Basis Points, Wednesday! But Why?

By Glenford S. Robinson

The Federal Reserve cut interest rate as expected, but why? The Federal Reserve Chairman, Jerome Powell said in his FOMC press conference that he wanted to make sure the economy remains in its current expansion phase. So, he and the Federal Reserve cut interest rate by 25-basis points to support that objective. So, even though the current outlook is favorable according to the Fed Chairman, he still cut interest rate. The average person would think that the only reason why the Federal Reserve is cutting interest rate is because the economy is heading into a recession. Why would a mechanic repair a car that does not need repair? That is the reason why many Fed officials are against cutting interest rates.

Opponents of interest rate cuts argued that the Federal Reserve should not be cutting interest rates because the economy is healthy. Popular opinion seems to think that the only reason why the Fed cut interest rate is to participate in the current currency war. Global Economies such as the Eurozone have kept interest rates at zero percent for many months now. So, globally, there has been a lowering of currency movement, and that is the reason why the U.S. Federal Reserve has been cutting interest rates. In fact, the way things look, there will be another round of interest rate cutting in the near future.

Existing Home Sales for August beats forecast of 5.37M with an increase of 5.49M edging out last month’s reading of 5.42M. The Existing Home Sales numbers tell us how well the economy is doing. When people buy homes, they also buy durable goods such as furniture and home appliances. People buy homes when they think the economy is doing well, and they can be confident that they will have jobs to help them pay their mortgages. If consumers think that the economy is not doing well, they won’t buy homes. So, based on the current home sales numbers, interest rate should’ve stayed the same because obviously the economy is doing well.

On the other hand, the Federal Reserve will mainly cut interest rates when they think the economy is on the verge of doing poorly. Therefore, the Fed may have seen something in previous economic data releases that prompted them to cut rates. Was it the last ISM Purchasing Managers Index (PMI) of manufacturing data that came in below forecast or was it the last New Home Sales data that didn’t beat forecast? A combination of these two economic factors and others could’ve been the driving force behind the Federal Reserve cutting rates.  

Is the Feds cutting rates because of pressures from President Trump? Or, is the Federal Reserve cutting rate as a result of uncertainties presented by the ongoing trade war between the U.S. and China? It seems as if all factors mentioned influenced the Feds in deciding to cut rates. Therefore, the Fed is not merely cutting rates as a result of an unhealthy U.S. Economy, instead the Fed is cutting rates as a preventive measure against a possible economic slow-down that could occur as a result of trade wars, currency wars, and interest rate wars. So, Mr. Trump’s resentment and disagreement toward the Feds has no direct bearing on interest rate decisions by the Federal Reserve as some pundits might think.   

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