When my cousin was 5 years old, she cut her ponytail off while playing beauty shop. When her Mom went to take her hair out of the ponytail, the whole thing fell into her hand.
Cutting hair isn’t bad unless you do it at the wrong time and the wrong depth. The Federal Reserve just made its first cut of this cycle, and they took a big one.
The Fed cut its rate by half a percentage point on Wednesday to start a change in policy direction and signaled two more cuts this year. Clearly, the Fed is comfortable with its fight against inflation and feels that keeping rates at a higher level would begin to harm the economy. The higher rate policy has damaged the housing industry and hurt lower-income earners who are starting to be late and have delinquencies on credit cards and car loans.
The rate cut helps some and hurts others. When rates are lowered, Americans with credit cards or other debts pay less interest on their loans, but at the same time, savers earn less interest on their CDs and savings accounts.
When will we start to see the effects of the lower rates? It is a slow process. It will take time for this and the upcoming rate cuts to move through the economy. Milton Friedman told the 1959 Congress that changes in Fed policy are like “a water tap that you turn on now that only starts to run six, nine, 12, 16 months from now.” No one knows how the economy and markets will react while we wait for the cuts to take effect.
Historically, by the time the Fed starts cutting rates, the economy is already tanking. The current U.S. economy isn’t tanking, but it is wobbling. The Fed must have some worry about a potential recession since it dropped its rate so big in the first cut. The Fed doesn’t cut rates to stimulate the economy when the economy is doing great. It lowers rates to kick-start or prop up the economy.
Small businesses, which are the backbone of the economy, are struggling with higher loan payments because of higher rates. We saw this on Tuesday with the Commerce Department’s latest retail sales report. According to the Wall Street Journal, only five of 13 categories rose in August, while 10 categories gained sales in July. Department store sales fell for the second consecutive month, showing the pressure retailers are having to attract customers whose budgets are pinched by inflation.
No one was surprised that the Fed cut rates today, but some analysts are raising their eyebrows because they started off with a half-point reduction. Obviously, the Fed officials started off strong in hopes of preventing a cooling economy from turning into a deep freeze. The Fed won’t regret the larger rate cut if the economy remains somewhat strong between now and their November meeting because rates will still be fairly high. However, if the economy and labor market deteriorate more rapidly, Fed officials will regret not having lowered rates sooner.
My aunt asked my cousin, “Why did you cut your hair?” My cousin said she wanted to be like Aunt Janis, a beautician at the time. Then, to make matters worse, my young cousin said, “But didn’t I do a beautiful job on my sister’s hair?” My aunt ran into the other room to see that the whole right side of her 2-year-old daughter’s hair was gone.
Hopefully, the Fed made the right cut at the right time, and the market and economy will keep charging ahead.
Have a blessed week.
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