Skip to main content

Federal Reserve Just Cut Rates, But Will This Impact Economic Growth That Much?

Publish date:
Video Duration:

The Federal Reserve just cut interest rates by 25 basis points for the third time in 2019, but the market had easily anticipated this outcome, begging the question of how much the move will actually impact economic growth.

The Fed cut the federal funds rate, the interest rate at which banks lend to each other daily, to a range between 1.75% and 1.50%.

Markets had priced this in. The S&P 500 is up 21% year-to-date, with the average stock trading at 17 times next year's projected earnings, slightly high compared to the last 10 years. Stock investors have hung their hats on low rates all year as economic growth has decelerated. U.S. GDP came in at an annualized 1.9% for the third quarter, below the second quarter's 2%, although the latest result did beat expectations. 

As for bonds, the 10 year treasury yield is at 1.79%, down from the 2.01% it was at August 1, the day after the second rate cut of the year. Fed Funds futures markets had priced in a 97% probability of a third rate cut.

TheStreet's Tony Owusu pointed out "Investors are already pricing this in." 

With rates already low, some areas of the economy like housing have already been buoyed by lower rates, even though the 10 year yield has been rising in the past two weeks. That's due in large part to the Fed's purchasing of short-term bonds in order to keep stimulating growth. 

Looking forward, "We'll have to wait and see because the yield curve has largely steepened since the Fed started buying short-term paper and that means that the 10 year benchmark treasury rate has increased, which has kind of put a stifle on housing activity," said Danielle DiMartino Booth, former adviser to the president of the Dallas Fed and founder and CEO of Quill Intelligence. But "the Fed's purpose of lowering interest rates is really to give interest rate sensitive sectors a boost. We'll have to wait and see if that flows through to better housing sales and better auto sales." 

Related Videos