If the Federal Reserve cuts rates, is that good news?

"There's a good possibility the nation's central bank will lower its Fed Funds rate - what banks pay overnight - at its next meeting Sept.17. Federal Reserve officials have acknowledged that a softening business climate may need help, overriding concerns about another bout of painful inflation. But cheers for such economic assistance - and some observers, including President Donald Trump, think the cuts should be steep - should be tempered. Why? When the Fed hands out discounted financing, it usually indicates the economy is in trouble."

"My trusty spreadsheet examined the relationship between Fed Funds and key economic variables over the past 40 years. The 480 months since 1985 were divided into three groups by 12-month changes in Fed Funds. When the Fed was most active - the 160 months with the most significant cuts - Fed Funds dipped on average to 3.8% from 5.6% 12 months earlier. That's a 1.8 percentage-point drop. And note that this rate has averaged 3.4% overall since 1985 and is currently at 4.3%."

"Mortgage dips: Home loans typically get cheaper as the Fed's slashing of short-term rates reverberates to longer-maturity financing. The 30-year rate fell to an average of 7.4% in the 12-month periods with the most extensive Fed cuts. That's down from 8.1% in the previous 12 months but above the 6.5% 40-year average. Such declines occurred 88% of the time following significant Fed actions."

A Fed rate cut at the Sept.17 meeting is possible as officials acknowledge a softening business climate may need support despite inflation concerns. Rate cuts commonly signal economic distress and cheaper financing does not provide an immediate fix. A 40-year, 480-month analysis divided periods by 12-month Fed Funds changes and identified 160 months of the largest cuts, when Fed Funds fell on average from 5.6% to 3.8%, a 1.8 percentage-point drop. Fed Funds have averaged 3.4% since 1985 and stood at 4.3% currently. Mortgage rates typically fall with such cuts; 30-year averages dropped to 7.4% in those periods, down from 8.1% the prior year and above the 6.5% 40-year mean, with such declines occurring 88% of the time. A Philadelphia Fed output index showed about 1.1% annual growth in the context of weaker business conditions.

Read at The Mercury News