Understanding California’s 2020 Solar Mandate
US monetary policy has far-reaching implications and a big change could be on the horizon. After nine rate increases since December 2015, Federal Reserve officials are meeting later this month to decide if a rate cut is appropriate. A rate cut could lead to prolonged economic growth but could also occur just before a recession starts.
The Federal Reserve operates under what is called the “dual mandate.” Established by Congress over 40 years ago, the Fed is responsible for maintaining maximum employment and price stability. To reach these goals, the Fed can adjust short-term interest rates, known as the federal funds rate. When times are good, the Fed will opt to raise rates and will lower rates in a weaker economic environment. To put this in context, we reviewed the history of rates over the past 15 years. See the breakout below.
Talks of a rate cut may seem unsettling because the economy is doing great, by a lot of measures. Job growth in June averaged over 200,000, Gross Domestic Product (GDP) is performing around potential, and the stock market keeps hitting record highs. Things aren’t completely rosy though. For example, the current inflation rate of 1.5% is, and consistently remains, below the 2.0% target. Low inflation alone wouldn’t be enough to warrant a rate cut but Fed officials are looking at the broader picture:
Given this information, the Fed has two choices: they can cut rates today as an insurance policy or wait until the data captures a clear and broad-based slowdown.
Rate cuts are used to reignite an economy by encouraging lending and supporting consumer and business spending. Historically, enacting expansionary monetary policy in the US has produced mixed results. In 1995 and 1998, small rate cuts did prolong the economic expansion. However, for 2001 and 2007, a recession was soon-to-follow. A likely cut later this month does not necessarily mean the start of an easing cycle and will give the Fed time to see if it boosts economic activity. Below are three key impacts from a rate cut:
The Fed is expected to follow through with the rate cut at the end of this month barring any unexpected change to economic data. There are potential upsides that can keep this economic expansion marching forward but also fundamental concerns that should not be ignored. A serious and often forgotten question is — why can’t the economy operate with rates at historically low levels? Rates are low enough to keep credit flowing and the fact that today’s economy needs a boost is worrisome.