The Federal Fund rate, which impacts interest rates, can potentially be cut at the Fed’s policy meeting this month. Cutting interest rates can potentially stimulate the economy by making borrowing cheaper, which encourages spending and investments. However, some experts believe that rate cuts may not be enough to boost the current economy. 

According to the CME FedWatch tool, investors are quite certain that the Fed will cut interest rates in September by at least 25 basis-points. There are several benefits that could arise from reducing interest rates. Loans would become cheaper for consumers and businesses. Consumers may be more inclined to borrow money for larger purchases, such as a home or a vehicle.  Lower rates can finance business operations and expansions, leading to the creation of more jobs.

There are a few who don’t believe cutting interest rates will help the current state of our economy. David Kelly, the chief global strategist at JP Morgan Asset Management, stated that interest rate cuts are inevitable, but “that’s not going to  fix anything.” Morgan discussed three reasons why he does not see rate cuts helping the economic picture with CNBC. 

• Lower interest rates could cut income for retirees. Retirees tend to store a larger chunk of their savings in safer assets, like US Treasurys, which are tied to interest rates in the broader economy. If the interest rate goes down, then the interest income decreases.

• Hesitant borrowers might make cutting rates have a backfire effect. Hesitant borrowers tend to “wait and see” if the rates will drop even further before taking the plunge to loan money just to make sure that they are getting the best rate possible. Kelly speculates that borrowers will be incentivized to wait for rates to drop further before taking out loans.

• There is still a looming uncertainty of how much the Trump administration’s tariff policy and immigration policy will affect the economy. Lowering interest rates will not remove this uncertainty. 

Lastly, there is always the concern that lowering interest rates will actually boost inflation in an already elevated state. If consumer demands increase too quickly due to lower rates, then the result is inflation. This would undermine the purpose of the rate cuts. 

In short, lowering interest rates may temporarily boost the economy. But the long-term effects of reduced interest rates are affected by many other factors that might limit their effectiveness in the current economy. Economic uncertainty, borrower behavior and inflation risks can complicate the benefits of monetary policy actions. 

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