The federal interest rate cut some .25 percent Wednesday, and a Tennessee Tech professor said the response expected.
Tech’s Dean of the School of Business and Professor of Finance Tom Payne said there has been some weakening in the economy. Payne said the Federal Reserve is trying to strike a balance with their mandate.
“We’ve got some inflation that’s ticked back up in recent months, so there’s a little concern about that rearing its head again,” Payne said. “But at the same time, the folks on the Fed are more concerned about the jobs market. And that market, unemployment has ticked up just slightly.”
Payne said the interest rate cuts show the Fed’s shift in concern, but it is a signal of more future cuts.
Payne said it was important for the Fed to give this signal Wednesday because bringing rates down can help stimulate the economy. Payne said this will help money go further, and potentially help borrower-based factions of the economy like real estate.
“Of course, [the Fed] has to be a little careful that they don’t overdo it by expanding the money supply too much and striking a little more inflation in the market,” Payne said. “That’s really their balance.”
Payne said finding this balance is part of why the Fed has been hesitant to drop rates since the last cut in December of 2024. Payne said the job market and inflation can sometimes be counter forces, as helping employment could spark inflation and vice versa.
Payne said one member of the Fed wanted a larger cut than what was passed on Wednesday. Payne said the cuts’ impact on the economy usually take a year to 18 months to be felt, so acting too fast or too slow on cuts can be problematic. Payne said cutting too slow can make the Fed fall behind.
Payne said the Fed tracks inflation data as it comes in, and those numbers are factored into decisions regarding the interest rate. Payne said these decisions also have impact on consumers.
“Historically, [interest rates] are higher than we’re accustomed to, you know, in the recent past,” Payne said. “And they’re coming down a little bit, so I think that can help us. But at the same time, we don’t want that inflation either. So that’s really what the Fed is trying to strike, you know is that balance.”
Payne said even though the signals of more cuts are promising, the Fed continues to monitor interest rates to see if another rate drop in the future is feasible.
Furthermore, Payne said there is always a possibility the interest rates backfire and ultimately hurt the economy. Payne said the thought is why the Fed takes a patient approach to cutting interest rates. Payne said the Fed may have a bias toward lowering rates, but it does not want to get too far ahead in making cuts.