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U.S. Federal Reserve Lowers Its Interest Rate

Posted By: Rachel Kavanagh

August 1, 2019

U.S. Federal Reserve Lowers Its Interest Rate – On Wednesday, July 31, the Federal Reserve in the United States announced that it would be trimming its target for the benchmark lending rate for the first time in over a decade by 0.25% to a range of 2% – 2.25%.

The Fed’s move brings its rate to within 0.5% of the Bank of Canada’s rate, which is currently at 1.75%.

Why the Cut? So far in 2019, the pace of hiring in the U.S. has been lukewarm, inflation is tracking below the Fed’s 2% target, economic growth has slowed, there is a continued trade war with China and there is no new North American trade deal.

As the central bank sees economic clouds on the horizon, the move hopes to stimulate the world’s largest economy.

What is this Interest Rate? U.S. banks must keep a certain amount of cash in reserve. If a bank needs more money, it can borrow from another on a short-term basis. The borrowing takes place within the federal funds market. The cost of these overnight loans is known as the federal funds rate. The rate is defined within its target range, which is now 2% – 2.25%. The central bank hikes its rate when it wants to slow down inflation and cuts when it wants to encourage people to borrow and spend.

This rate is the fundamental interest rate in the U.S. and arguably the entire world, influencing the course of just about everything. The central bank’s rate filters down into the economy by affecting the rates that retail banks offer to savers and borrowers on items like savings accounts and mortgages.

How Does this Interest Rate Affect Canadians? The lower rates are good for stocks and the Canadian to U.S. exchange rate. Borrowers will see the greatest benefit by the Fed’s rate cut. The move reinforces the Bank of Canada’s stance on interest rates and is expected to hold its rate steady at 1.75%. As the Bank of Canada’s overnight rate goes, so go the costs of borrowing via home equity lines of credit, floating-rate loans and variable-rate mortgages. Rates on these types of loans are locked in as long as the Canadian economy holds up.

Rates on fixed-rate mortgages have fallen this year and the trend looking ahead is favourable if renewing a mortgage or buying a house. The cost of fixed-rate mortgages follows what’s happening in the bond market, where interest rates have fallen in the past 12 months.

Five-year fixed-rate mortgages are the best all-around value today and offer consistency during an inconsistent time. Typically, variable rates have been the more popular choice, but a discounted five-year rate mortgage today is averaging 2.9 – 3.3% putting it very much in line with fixed rates. Make sure you speak to a mortgage broker to get the best advice for your current situation. Use our mortgage calculator to provide an estimation as what you can expect.

During the last several months even though the Bank of Canada has witnessed strong economic growth it is still holding its stance on monetary policy, even with the Fed’s lowering rates.

Canada has generally waited on making decisions on its economy until hearing from the United States. The current economic situation should give the Bank of Canada some short-term comfort that being the leader can be beneficial.

* U.S. Federal Reserve Lowers Its Interest Rate written by Benczik Team Realty.

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