Former Federal Reserve Governor Kevin Warsh talks about the Fed’s “Kudlow” interest rate cut decision.
Investors welcomed the return of the easy monetary policy era after the Federal Reserve cut interest rates for the first time since March 2020 and expectations that rates could fall further over the next two years.
Chairman Jerome Powell was asked by FOX Business’ Edward Lawrence whether there was a chance the U.S. could return to the so-called low-interest-rate era, when interest rates hovered around zero.
“That’s a great question that you can only guess at intuitively,” Powell said. “My own feeling is that we’re not going to get back to that situation. But, frankly, we’re going to find the answer. But it feels to me like the neutral rate is significantly higher than it was back then.”
“How high? I don’t think we’ll know.”
Fed cuts interest rates by 50 basis points: what you need to know
The target for the federal funds rate is currently between 4.75% and 5.00%, but the central bank predicts that interest rates could fall below 4%.
Ticker Securities Last Change Percentage Change I:DJI Dow Jones Industrial Average 42063.36 +38.17 +0.09% SP500 S&P 500 5702.55 -11.09 -0.19%
Investors have welcomed the move, boosting stock prices that were already at record levels: The Dow Jones Industrial Average has surpassed 42,000 for the first time in history, and the S&P 500 is trading at an all-time high.
How the Fed’s historic rate cut affects your everyday finances
Dow Jones Industrial Average
The last time policymakers cut rates was in the midst of the COVID-19 pandemic’s raging public health and financial crisis, when the Fed cut interest rates to a 1% to 1.25% range in March 2020, the biggest cut since the 2008 financial crisis.
“The spread of the coronavirus has introduced new challenges and risks,” Fed Chairman Jerome Powell said at a press conference at the time. “The virus has affected many communities around the world and has disrupted economic activity in many countries. The virus and the measures being taken to contain it will undoubtedly weigh on domestic and international economic activity for some time.”
Federal Reserve Chairman Jerome Powell made the remarks at a press conference following the Federal Open Market Committee meeting in Washington, DC, on July 31, 2024. (Al Drago/Bloomberg via Getty Images/Getty Images)
Americans are enjoying the lowest borrowing costs in a generation: The 30-year fixed-rate mortgage, for example, fell to a record low of 2.65% in January 2021, according to Freddie Mac.
How far could mortgage rates fall?
A home under construction in Sacramento, California, on July 3, 2023. (David Paul Morris/Bloomberg via Getty Images/Getty Images)
The current easing cycle is still in its infancy, and we are still a long way from the disruptions caused by the pandemic. Still, while borrowing costs will start to fall, interest rates are unlikely to return to their four-year lows.
Federal Reserve chairman explains why he voted against
Moreover, inflation remains a risk, which is why Federal Reserve Board Governor Michelle Bowman was the lone dissenting vote and voted against cutting rates.
“While core inflation remains at or above 2.5 percent, I believe there is a risk that the Committee’s larger policy actions could be interpreted as a premature declaration of victory on our price stability mandate. We are not yet at our inflation target,” he explained on Friday.
