Putting the “Fun” in Fed Funds Rate Cut
By Steven Higgins, Financial Advisor, Principal
Last week the Federal Reserve Board met and, as expected, cut the fed funds discount rate to 2.75% as well as the fed funds fate target range to 2-2.25%. This cut was the first by the Federal Reserve Board since the depths of the Great Recession in 2008. The much debated yet anticipated cut comes amid what has become a huge political if not pop-cultural backdrop of what has essentially become Trump vs. Fed. The president has not been shy about his displeasure about the previous interest rate increases by the Fed. Since the President’s election in November of 2016, the Fed has voted to increases rates 8 times. In a nutshell, the President’s supporters will likely argue that Trump scored a huge victory by essentially bullying the Federal Reserve, an independent bank, into changing their policy in the face of political pressure. Others will maintain the need for the rate cut is the potential economic storm and possible recession that could be caused by the President’s trade war with China among others. An objective observer may conclude both camps are possibly correct.
The fed funds rate has become fodder for many a political rant but few people really know what the Fed is or what the Fed’s role in our economy is. Here are some fed funds tidbits… tell your friends!
What is the Fed Funds Discount Rate, Fed Funds Rate, and the (Effective Rate), & the Target Range
The fed funds discount rate the only rate the Fed can adjust, is the rate at which the Federal Reserve board lends money to select major banks. The fed funds rate or the effective rate is the rate at which banks lend money to each other. The effective rate changes daily. The Fed’s target range is the Fed’s intended range in which the Fed hopes the effective rate will land.
The lower the fed funds rate, the more liquidity in the system. The higher the rate the less liquidity in the system. In practice, lower rates should stimulate growth in the economy but could ultimately cause too much inflation. Higher rates should slow an economy down and keep it from “over heating,” but could choke off money supply and lead to a recession.
Trump’s Man?
Fed Chair Jerome Powell, who has clearly drawn the ire of the President, was nominated for his position by Trump. However, he was originally appointed to the Fed Board in 2011 by former President Obama. Powell was the first Fed Board Governor since 1988 to be nominated from the President’s opposition party.*
Who’s Idea Was This Anyway?
“The United States had a long but less than illustrious history with central banking,” wrote Neil Irwin, of the Washington Post. Alexander Hamilton, the first Treasury secretary, believed a national bank would stabilize the new government. Over 100 years later, President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913. The Act established the Federal Reserve System to oversee the nation’s money supply and provide an “elastic” currency that could expand and contract in response to the economy’s changing demand for money and credit.**
Fed Funds Rate Targets Before a Rate Cut Since 1990
Data source: ycharts.com, fedprimerate.com
*Source: www.federalreserve.gov
**Source: -Neil Irwin, Washington Post
-Federal Reserve Bank of San Francisco
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial. The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
