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Interest Rates cut a quarter point

Jerome Powell (Credit: Office of the Federal Reserve)

The Federal Reserve cut interest rates by a quarter point earlier this week for the first time in more than a decade. Weak global growth, uncertainty over the trade war, low inflation, and a chill in business investment were the key factors driving the decision. 

Macro-economic update:

  • Positive news: The U.S. consumer confidence reading showed strong consumer spending. It increased 4.3% in the second quarter, while government spending rose 5%.
  • Negative news surrounding business investment: Firms are dramatically slowing down spending and delaying big projects because of economic uncertainty. For example, non-residential investment fell 0.6% in Q2, the first drop since 2015, and residential investment decreased for a sixth straight period. Moreover, Readings on the U.S. manufacturing sector have fallen for 6 straight months — nearing an outright contraction — and the freight industry also has been slowing for the better part of the year, according to NYTimes.

Worth Noting: President Trump announced yesterday that he will slap 10% tariffs on $300 billion of Chinese imports starting September 1st. This increases the likelihood of further rate cuts.

Upshot: Moody’s Analytics Mark Zandi: “Something has got to change. Either consumers hold tough and cheer up businesses and they resume investing again, or businesses lose faith and cause consumers to pack it in, and we go into recession.” [NYTimes]

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