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Lower interest rates: The Fed’s Response

In an attempt to save the economy from the downward spiral caused by the novel coronavirus, the Federal government has decided to lower interest rates by half a percentage point which brings the interest rate to a range of 1-1.25 percent. This is done with hopes to spur growth in
the economy which in turn has a multiplier effect on employment and inflation. It is the first of its kind since the 2008 financial crisis and was done in response to the mounting pressure governments faced due to the risks that the virus imposes on economic activity. Whether or not this helps the economy is the million dollar question.

We Live In Uncertain Times

It’s not hard to sense the level of urgency that comes attached to this interest rate cut. All indicators point to the fact that the coronavirus pandemic has created an uncertain situation that continues to remain fluid. Given that the cure for the infection is still in the works, the
government had to find ways to keep the economy afloat. Lower interest rates would improve the public sentiment while buying time for fiscal authorities to come up with a more concrete solution. When the announcement was made, volatility in the markets increased while
some stocks even moved to green territory.

How Do Lower Interest Rates Affect You?

A cut in interest rates of this magnitude is done to bolster economic activity and encourage spending but it also has its winners and losers. For mortgage holders, a lower interest rate means that you can find a mortgage at a great rate or refinance your existing one at a low cost.
At the same time, some people are unable to take advantage of these rates if they are tied into a fixed or underwater mortgage.
Another major proponent of the cut in interest n an attempt to save the economy from the downward spiral caused by the novel coronavirus, the Federal government has decided to cut the interest rates by half a percentage point which brings the interest rate to a range of 1-1.25 percent. rates is the stock market where the impact is mostly positive. Lower interest rates make it easier to borrow money thereby increasing economic activity. This increased optimism translates to higher stock prices as demand increases. When
the Fed announced that interest rates would be slashed, the S&P 500 increased by 4.6 points. On the contrary, while investors benefit from the cut in interest rates in the short term, this can also result in losses in the medium term.

Is The Cut In Interest Rates Sustainable?

Experts predict that more interest rate cuts could be on the way with rates going as low as zero. Given the alarming news headlines of the rapidly spreading virus, the Feds need to do everything in their power to combat this issue. While this does not directly impact the pandemic itself, it can help ease the negative impact on the financial markets. Alas, lower interest rates are only a cure for public sentiment and there’s only so much the government can do to solve all the problems caused by the pandemic like the broken supply chains in China or the increasing number of people that are infected every day. Moreover, there is a limit to how low interest rates can go. The only viable solution is for governments of nations all over the world to work together to come up with a public health response that can minimize the spread of the infection and lower the severity of the outcome.

With that being said, a fiscal stimulus such as this one does buy the government some time to find an answer and prevent the economy from taking an unnecessary turn for the worse.

Written By: Divya Prem

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