Lisa asks…
Effect of Fed cutting interest rates on Wall Street?
Why does the cutting of interest rates by the US Fed spook Wall Street and cause a dip in the stock markets? Also what does cutting interest rates mean for banks specifically?
answers:
The Fed cutting interest spooks Wall Street only because at this juncture it may signal that the economy is in worse shape than we think. Interest rates are already at a very low level of just above 2% (negative in real terms, after you account for inflation). However, the Fed’s interest rate cuts act as a stimulant to the economy, as it will encourage businesses to invest more given cheap cost of credit. As for the second part of your question, for the banks specifically lower Fed funds rates mean lower cost of funding, so it lowers their cost of doing business. The banks typically pass on the lower cost to their prime customers by lowering the Prime rate at which clients borrow funds.
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