The Federal Reserve cut interest rates this week by a quarter of a percentage point, a move aimed at boosting investment and job growth.
While the weak job market makes a strong case for easing rates, current economic conditions and examples from the past three decades suggest the move may not be enough to turn the economy around. Federal Reserve Chair Jerome Powell described the current situation as unusual.
What makes it unusual is first that inflation has been a little bit stubborn, said Dr. Wafa Hakim Orman, associate dean of the College of Business at the University of Alabama in Huntsville.
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Orman said wildly fluctuating tariff policies have prevented inflation from reaching the Federal Reserves 2% benchmark. Slow job growth is also a contributing factor.
Were starting to see some weakening and there are different sources of uncertainty right now in the job market, Orman said.
That uncertainty is leading businesses to slow investments and hiring. Lowering rates is a standard Fed tool to encourage spending and in the short term, consumers and businesses will likely benefit from better rates on mortgages, auto loans and more. But it can also worsen inflation, as seen during the COVID-19 pandemic.
On a long-term bases, its dangerous, I will say, to lower rates when you have inflation going on, said Jeff Lichtenstein, president and broker at Echo Fine Properties. Thats historically what we dont do. And we got into some of the mess that we got in the pandemic.
The Fed also slashed rates to near zero during the global financial crisis in 2008. Despite aggressive cuts, the economy still entered a recession.
That was a perfect storm, which we dont have today, Lichtenstein said. And that storm was short sales and foreclosures and mass unemployment that was super heavy. It was the great recession.
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During the dotcom bust in the early 2000s, however, rate cuts had the intended effect: U.S. GDP rebounded by more than 2% within a few years.
Economists say rate changes are best seen as a stabilizing tool rather than a cureall.
I think the crucial thing, businesses need some stability and the ability to plan for the long term in order to invest, Orman said.
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