The Fed Cut Interest Rates – What It Means for Your Bags

TLDR

• The Fed cut interest rates today by a quarter point.
• This is uncommon, as inflation is what the Fed wants to see.
• The market dipped slightly on the news, but other factors are also at play that could be impacting the crypto market.

The Federal Reserve announced today that it’s cutting the policy interest rate by 0.25%. This stuff has a ripple effect that touches everything from your savings account to the price of your groceries, and yes, even your crypto portfolio.

A rate cut makes it cheaper for people and businesses to borrow money. The goal is to get everyone spending and investing, which usually gives the economy a boost.

Unfortunately, inflation has been a bit of a party crasher lately. Usually, the Fed raises rates to fight inflation. There are a lot of moving parts and a lot to unpack. Let’s get after it.

The Economic Vibe Right Now

To understand the Fed’s move, you need to know what they’re looking at. Fed Chair Jerome Powell laid it all out in his press conference, and it’s a mixed bag.

The Job Market is Cooling Off

On one hand, the job market, which has been running hot for a while, is starting to chill out. Powell noted that payroll job gains have “slowed significantly,” down to just 29,000 per month over the last three months. For context, economists generally think we need to add around 100,000 jobs per month just to keep the unemployment rate from rising.

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The unemployment rate itself has crept up to 4.3%. While that’s still low by historical standards, the trend is what matters. Powell mentioned that “downside risks to employment have risen”. 

Inflation is Still a Buzzkill

At the same time, inflation is being stubborn. The latest Consumer Price Index (CPI) report, a key measure of inflation, showed that prices for everyday items went up 0.4% in August. Over the last year, prices are up 2.9%.

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Let’s break that down:

• Food: Your grocery bill isn’t imaginary. The food index jumped 0.5% in August, with food at home (groceries) rising 0.6%. Over the past year, groceries are up 2.7%.
• Shelter: Rent and housing costs, which make up a big chunk of most people’s budgets, rose 0.4% in the month.
• Energy: Gas prices increased by 1.9% in August, contributing to a 0.7% rise in the overall energy index.

The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, is also showing sticky prices. Core PCE, which strips out the volatile food and energy categories, is at 2.9%. The Fed’s target is 2%. So, we’re still a ways off.

Powell acknowledged this tension directly, stating that in the near term, “risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation.”

Why Cut Interest Rates Now? It’s a Balancing Act

So, if inflation is still high, why on earth would the Fed cut interest rates? It comes down to their “dual mandate”: keeping prices stable and achieving maximum employment. Right now, those two goals are in conflict.

Fighting inflation would mean raising rates, which could slow the economy down so much that it triggers a recession and costs people their jobs. Supporting the job market means cutting rates, which could pour fuel on the inflation fire.

The Fed decided that the risk to jobs was the more immediate problem. As Powell put it, “With downside risks to employment having increased, the balance of risks has shifted”. 

They see the slowdown in hiring as a signal that the economy needs a little help. The 0.25% cut is their attempt to provide that support without letting inflation get completely out of control. It’s a delicate and risky balancing act.

What This Rate Cut Means for You and Your Bags

Okay, let’s get to the part you really care about. How does this decision from on high actually affect your life and your wallet?

Your Savings and Loans

• Savings Accounts: A rate cut is generally bad news for savers. Banks will likely lower the interest rates they offer on high-yield savings accounts, meaning you’ll earn less on your cash.
• Credit Cards: Credit card interest rates are variable and often tied to the Fed’s policy rate. This cut could lead to a small reduction in your credit card’s APR, but don’t expect a dramatic change.
• Mortgages and Car Loans: The impact here is less direct. While the Fed’s rate influences all borrowing costs, long-term loan rates like mortgages are also affected by market expectations. The cut might lead to slightly lower rates, but it’s not a guarantee.

The Stock Market and Your Crypto

This is where things get interesting for investors.

• Stocks: Lower interest rates are often seen as a green light for the stock market. It makes borrowing cheaper for companies, which can boost their growth and profits. It also makes holding cash or bonds less attractive, pushing investors toward riskier assets like stocks.
• Crypto: The crypto market, at least lately, has been moving in sync with the stock market, especially “risk-on” assets like tech stocks. When the Fed signals a move toward easier money (lower rates), it can create a more favorable environment for assets like Bitcoin and Ethereum. Investors might feel more willing to take a chance on crypto when the returns from safer assets are lower.

However, don’t pop the champagne just yet. The reason for the rate cut matters. If the Fed is cutting rates because they’re scared of a recession, that’s not exactly a bullish signal for any asset class. It’s a sign of weakness in the economy, which can spook investors across the board.

Secondly, the market has gone slightly red in the trading hours since Powell’s press conference. On top of that, Ethereum’s validator exit queue is incredibly high, and volume is starting to slow.