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The Federal Reserve is Running Low on Ammunition

The Federal Reserve lowered interest rates 0.25% on July 31st.  In doing so the Federal Reserve used up some of it’s ammunition for future needs. There are two tools (ammunition) the Federal Reserve uses to fight recessionary pressures.

1. Cut Interest Rates.


During a recession, the Federal Reserve usually cuts interest rates. By lowering interest rates, it reduces the cost of borrowing money and the intented consequence is to have people borrow more money to stimulate the economy during a recession. I think the Federal Reserve is trying to get ahead of a recession by lowering interest rates early. Fed Chairman Powell sited slowing global economic growth and slowing manufacturing as the reasons for lowering interest rates. This action may be positive and could possibly delay or kick the can of recession further down the road. 

Here is the potential longer-term concern about lowering interest rates now. Looking at the following chart from the Federal Reserve you will see the previous recessions are shown in gray. Notice where interest rates were at the beginning of each previous recession. Interest rates were much higher before each recession than they are today.  The Federal Reserve had more ammunition available previously, because interest rates were higher so they had more wiggle room to lower interest rates than they do today. 

If the Federal Reserve lowers interest rates a second time later in the year, they reduce their ammunition again. If we do go into a recession in the future, they will have less tools to fight the recession problems.

No one knows when a recession will occur. The only things we can do is analyze data from past recessions and anticipate or prepare incase a recession happens again.

With this recent interest rate cut many analysts now say a recession is not in the near future. We will watch to see if the rate cut helps avoid a recession.  

2. Print More Money (quantative easing).


The second way the Federal Reserve will stimulate the economy is to print more money and then buy things like treasury bonds or mortgage backed securities. In the previous recession this was not as effective as the Federal Reserved hoped it would be and consequently they had QE1, QE2, QE3 and more. Stay tuned.