You are using an older browser version. Please use a supported version for the best MSN experience.

Why the Federal Reserve Just CUT Interest Rates

In this video we’re going to look at why the Federal Reserve cut interest rates, even though the U.S. economy is performing well. The Federal Reserve recently announced that it's cutting interest rates, the first time it's done so since 2008. Rate cuts generally coincide with some sort of economic weakness, which makes the Fed's recent decision a bit uncommon. The last time the Fed began a rate-cut cycle was during the Great Recession. At the time, unemployment had started to tick upwards and there were some major signs that the economy was beginning to fall apart. For example, housing prices had already fallen significantly by the time the Fed made its first move. But the Fed’s recent rate cut comes at a time when the U.S. GDP growth is strong and the stock market is at all-time highs. Additionally, the unemployment rate in the U.S. sitting at just 3.7% right now, which is extremely low in a historical context. So why did the Federal Reserve cut interest rates this time? To understand why a rate cut makes sense this time around, it's important to realize that the Fed has a dual mandate: The first is to maximize employment and the second is to maintain inflation at a desirable level. With the unemployment rate at about 3.7% right now, employment is maximized already. However, inflation has been extremely low -- well below the Fed's 2% target rate. Which means there's a solid case to be made that it's in the economy's best interest to help sustain the current expansion by cutting rates. Additionally, global economic growth has started to slow, and the ongoing trade war between the U.S. and China is prompting an elevated level of caution among policymakers. Some experts think that the Fed might make several rate cuts in order for it to reach its inflation goal. The bottom line is that the U.S. economy is solid, but the global economy isn't quite as strong as the Fed would like to see. Cutting interest rates should help inflation start to tick upward and allow the U.S. economy to continue growing. ------------------------------------------------------------------------ Subscribe to The Motley Fool's YouTube Channel: Join our Facebook community: Follow The Motley Fool on Twitter:



Editor's Picks


Featured Partners

image beaconimage beaconimage beacon