The markets set new record highs last week, as the Personal Consumption Expenditures, or PCE, Report was released. This is the Federal Reserve Bank’s preferred measure of inflation. In August, the index fell by more than expected, to 2.2% -- the lowest level since February 2021.[1] In addition, to counter a sharp slowdown in growth in China, the government there approved a large stimulus package.
The Federal Reserve is actually a group of banks – 12 in total, spread out across the United States. Together, they form the Federal Reserve System. The banks conduct economic research, process paper checks, and serve as the bank of the US Government, maintaining accounts for the U.S. Treasury and conducting government securities auctions. Beyond that, the Federal Reserve Banks are the “lender of last resort”, available to lend money to commercial banks to meet their regulatory requirements for cash on hand.
In addition to the normal executives you would expect for each bank, there is an overarching governing body, called the Federal Reserve Board of Governors. There are seven members, appointed by the President for 14-year terms. The Board of Governors also all serve on the Federal Open Market Committee, or FOMC. Together with the Chairman of the Federal Reserve Bank of New York and four other Bank Chairs, the FOMC sets monetary policy for the United States.
Unique among central banks world-wide, the Fed has a dual mandate. Most countries’ central banks are only concerned about price stability, or inflation. In the US, the Fed has set a goal of 2% average inflation. The Fed must also work towards maximum employment rather than just considering inflation.
The dual mandate is partially why rate cuts took so long. The Fed was focused on the inflation side of the coin and held rates until the job market started to cool. With inflation falling back towards their goal, and the job market tightening, the Fed has more room to cut interest rates.
What does this mean for individuals? For savers, it may be time to lock in longer-term CDs or bonds or consider moving towards riskier asset classes. For borrowers, dropping rates reduce the cost of credit cards and new loans. As interest rates continue to drop, some borrowers may want to evaluate refinancing their mortgages or other debt.
Your action item this week is to review your credit card spending, interest rates, and fees. If you pay an annual fee for a card, consider if you’re receiving enough to offset the fee. If you are carrying debt, you may want to look for a new card, or ask the card company to lower your rate.
Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and to register for our upcoming educational events. Don’t forget to drop by our office with a sweater, fleece, or sweatshirt for #justonesweater.