At the end of last month, the Fed cut the rates 0.25%. This was anticipated and there was plenty of speculation that it might even be dropped 0.5%. Not so surprisingly, investors are already talking about the next drop due before 2020. According to a WSJ article, odds are in favor of a 0.75% drop, bringing down the rate to 1.5% – a record low. This has both positive and negative implications for the economy at scale.

The good:

The lower rate allows large companies who borrow at LIBOR+ to afford more debt to fund their companies’ endeavors. It directly impacts homeowners and the housing market by allowing them to borrow more at lower rates to afford housing – which is increasing drastically in major metropolitan areas. For real estate developers & investors, the lower rate allows developers to increase the quantity and quality of the buildings they are developing. Investors can more easily afford the extremely low cap rates properties are selling for in metropolitan areas. In addition, they can refinance their current projects and reinvest that influx of capital into the economy.

The bad:

By lowering the rate, the Federal Reserve is admitting that the economy has come to a standstill and that they need to stimulate growth with a drop in rates. This comes at a time when the stock market has hit record highs in the past 10 years and the economy has been performing exceptionally well. However, the price for housing has gone up exponentially and we aren’t seeing a similar rise in income. Technology is changing the way many businesses are done, and the millennial generation is approaching a work lifestyle that is unconventional and unpredictable. With millions of square feet of retail space empty across the country, there is definitely a change in how Americans are spending their money. Americans are at record highs for the debt – especially millennials in credit card debt and student loans. 

In short:

The Fed lowering rates reminds us that the economy is cyclical. Although the past 10 years have been phenomenal, the Great Recession of 2008 still lies in our subconscious. The rising price of gold, the slowly degrading stock market (which recently saw its worst day of the year), the crumbling return on the 10 year T-bill are all warning signs of an economic downturn.  

 

Source:

https://www.wsj.com/articles/european-stocks-rise-while-gloom-lingers-in-asia-11565164273?mod=hp_lead_pos1