Current Event – Fed Rate Cuts

Current Event – Fed Rate Cuts

The Fed employs interest rate cut as part of its fiscal policy in regulating the economy. These initiatives are meant to enhance economic stability and promote GDP growth. This report seeks to summarize Federal Reserve Bank of Chicago President Charles Evans Frankfurt’s speech and explore the implications of the Fed rate cuts on the economy.

Presently, the US economy is stable in spite of a decline in the investment and manufacturing sectors. These slowdowns have not severely affected the economy, as it projects a 2.25% growth (Derby). Even though the economy is stable, the implementation of mitigation measures is crucial. Fiscal and monetary policies are primarily employed in the regulation of the economy. In this case, the interest rates fiscal policy is used in controlling the state of the economy. Evans contends on the importance of maintaining a healthy economy even during boom cycles. The reason is that the economy is quite dynamic as it is subject to factors such as inflation and interest rates.

Evans noted that unemployment rates are expected to remain slightly below 4%. Low levels of unemployment exhibit a healthy economy. On the same note, the central bank aspires to a 2% inflation rate (Derby). Inflation is necessary for preventing the economy from plunging into a recession. It is initiated by increasing money supply in the economy. Even though the inflation threshold has not yet been attained, economic growth is progressive and will be maintained in this state through the implementation of the Fed rate cuts.

The economy is predisposed to risks that would result in high costs in the event of an occurrence . Financial risks are categorized into high-risk, low probability, and low-risk high probability. Even though these risks would be retrogressive in the event of incidence, they are least likely to occur. Nonetheless, there is a need for implementation of risk management policies to eliminate even the slightest probability of occurrence.

The execution of the interest Fed rate cuts is essential in achieving an investor-friendly environment. The Fed rate cuts would cause commercial banks to decrease interest rates on loans. As a result, investors would have more incentives to borrow loans and invest them in various financial instruments such as stocks and options. These investments would deem profitable since the revenue earned would be sufficient to repay the inexpensive interests. Therefore, the Fed rate cut would be coupled with multiple investments in the economy.

The rate cuts would facilitate the issuance of cheap loans by financial institutions. As a result, industries would have the incentive to borrow. These debt obligations would be steered towards scaling up production (Keynes 146). The increased output would enhance profitability since firms would earn more revenue. Consequently, employment opportunities would increase since firms would hire more workers as a result of the expansion in operations. With cheaper loans available, companies would be in a position to seek additional debts in financing their activities. Hence corporates would favor debt acquisition in place of equity in their capital structure.

Cheap loans provide minimum incentives to bankers due to their high risk and low rates of return characteristics. Normally, banks are interested in high-risk, high-return businesses as they maximize their profits. In this case, such loans are risky since their accessibility is enhanced and the rate of default is increased.

Works Cited

Michael, Derby. (2019). “Fed’s Charles Evans Says U.S. Still on Path for ‘Solid’ 2.25% GDP This Year “. The Wall Street Journal. https://www.wsj.com/articles/feds-charles-evans-says-u-s-still-on-path-for-solid-2-25-gdp-this-year-11569917700. Accessed 10 October 2019.

Keynes, John Maynard. “The General Theory of the Rate of Interest.” The General Theory of Employment, Interest, and Money. Palgrave Macmillan, Cham, 2018. 145-153.

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Current Event – Fed Rate Cuts

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