Today, I am going to keep this short and sweet. My objective is to educate you on interest rates and the risk they can create. The Federal Reserve raises and lowers interest rates and sets the benchmark for where they think interest rates should be. When the economy grows too much to fast, it can RAISE interest rates to slow it down. When it looks like we are heading towards a recession, the Fed LOWERS interest rates to stimulate economic growth.
That is easy enough to understand.
During the recession after 9/11, before the Fed started lowering interest rates, the interest rate was as high as 6.5%. They decreased it to 1% through a series of interest rate cuts to stimulate the economy.
During the Great Recession in 2008, before the Fed started lowering interest rates, the interest rate was as high as 5.25%. They aggressively decreased the interest rates to .25% to stimulate and SAVE the economy.
In both cases, they had to lower interest rates by 5% to 5.5%.
Today the highest that the Fed's interest rate (also referred to as the Federal Funds rate) was 2.5% in 2018. That was after economic growth for nine years. Yesterday the interest rate stood 1.75%. Today because of the possibility of a pandemic, the Fed lower the key interest rate from 1.75% to 1.25%.
So, I hope you see this question coming.
The past two recessions required a minimum of 5% in interest rate cuts, and we only have room for the Fed to reduce interest rates by 1.25% before we get into negative rates.
What are they going to do when we have no economic growth, and we are in a recession?