Econ 101 on Rate Cuts
After mulling over the possible consequences of last week’s rate cut – I realize that this topic has been permeating all of my posts to date – I decided to go back to some Economics 101 material and some of the events that have already transpired for further reflection.
Rate cuts have multiple effects on the economy, as it pulls multiple levers, some of which may very well have offsetting impacts. For one, as interest rates decline, domestic money-market/ fixed interest assets become relatively less attractive to international investors, causing them to withdraw their funds from the U.S. in search of relatively higher yields. This should cause the value of the dollar to decline relative to other currencies, which is something that we have already witnessed. In fact, at $1.41/ Euro, the greenback has now reached an all-time low against the European currency. The dollar is also reaching record lows against the yen.
Furthermore, the rate cut, though it may serve to allay fears of a U.S. recession, is stoking concerns of inflation – this has served to drive up long rates. Increasing long term bond yields also mean that mortgage rates will not be dropping anytime soon.
Which leads to my final thought for the day, which is the most important: the rate cut will do little, if anything, to alleviate the pressure on mortgage borrowers.
Total: 219 words
Time: 10 minutes
*** The above text was written (and spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***