federal reserve cuts interest rate for third time this year in effort to boost u s economy

Case Study 2

(40 points)

Due: 11:59pm April 5

Objective: Students will learn how to identify the globalization issue in the case study; analyze the situations; and make suggestions or recommendations to solve the globalization problems. Creative suggestions or recommendations are especially encouraged!


  • Please read the case study and answer the 4 questions below.
  • Case study 2 should be turned in on Canvas with an attached word file (see the “assignments”)
  • Please note the deadline. If you miss the deadline, but turn in the assignment within 3 days (11:59pm April 8), 5 points will be deducted for the delay. After 3 days passed the deadline, no late work will be accepted. Please submit the late turn-in to Dr. Rebecca Tang through the email on Canvas.
  • The turn-in should be single-spaced with 1-inch margins in 12 point Times New Roman font. APA style is preferred if reference is needed. Please limit your answer between 2 and 4 pages for each assignment (excluding references, appendices, or visuals). In your turn-in, please include the specific questions and your corresponding answers. Don’t include the text body of the case study in the instruction.

Background Study: Students are advised to conduct background research of Fed raising before answering the questions. (Background study does NOT need to be shown in the answer sheet students turn in). There are several potential approaches of background research:

  • Go to Wikipedia to read more about the definition of Fed raising rate: https://en.wikipedia.org/wiki/Federal_funds_rate
  • Take advantage of the short videos on youtube. The keywords are “Fed raising rates”. You could find many videos from different voices relevant this topic.

Federal Reserve cuts interest rate for third time this year in effort to boost U.S. economy

Source: https://www.washingtonpost.com/business/2019/10/30…

The Federal Reserve reduced the benchmark U.S. interest rate for the third time this year Wednesday in an effort to boost the economy as the trade war and a global slowdown threaten to drag the U.S. economy down. But it also signaled that its campaign of rate cuts has likely come to an end for now, with Fed Chair Jerome H. Powell telling reporters that the current stance was “appropriate.” Fed leaders have stressed that they do not see a recession on the horizon. Instead, they have sought to portray these rate reductions as “insurance” cuts that are meant to give the economy extra protection in a world of rising uncertainty.

The central bank lowered the benchmark interest rate a quarter of a percentage point to a range of 1.5 percent to 1.75 percent. The move should trigger mortgage, auto and personal loan rates to fall, making it cheaper to borrow money. Home prices and home sales have ticked up somewhat since the Fed began lowering rates in late July.

“Weakness in global growth and trade developments have weighed on the economy and posed ongoing risks,” Powell said. He stressed that the three rate cuts have added “significant” stimulus to the economy and he suggested that the central bank would likely stand pat and not cut rates further unless the economy deteriorates substantially.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” Powell said. “If developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a pre-set course.”

Stocks ended the day higher, with the Dow Jones industrial average climbing 115 points.

President Trump and Wall Street are looking for signals of how much more the Fed will lower rates heading into the presidential election, but Powell suggested on Wednesday that it was pausing for the foreseeable future. “This is the clearest signal we’ve gotten that the time for action is over for the Fed,” said Mike Loewengart, vice president of investment strategy at E*TRADE.

Fed leaders signaled Wednesday that they are going to wait and see what happens to the economy and trade talks before they commit to another cut. All summer, Powell stressed that the Fed would “act as appropriate to sustain the expansion,” but that phrase was scrapped from the statement announcing the latest decision.

The U.S. economy is growing at a “moderate” pace, and hiring remains strong, the Fed said, but business investment is weak, and “uncertainties about this outlook remain.” Growth in the third quarter slipped to 1.9 percent, the Commerce Department reported Wednesday, one of the slowest paces in recent years.

“Although household spending has been rising at a strong pace, business fixed investment and exports remain weak,” the Fed wrote in the statement.

Fed leaders anticipated that growth would cool this year and next to around 2 percent, a level they considered the long-run trend pace for the economy. The rate cuts are meant to prevent growth from slipping much below that pace. There is concern that businesses have slashed spending in recent months and that they could turn around and cut workers next, but so far hiring has remained solid.

Trump has repeatedly bashed the Fed, and argues caused companies to pull back on spending. After the Fed’s move Wednesday, U.S. interest rates are now at the same level as they were in spring 2018. Most business leaders say trade uncertainty has caused them to scale back investment as they wait and see what happens with talks between the world’s two largest economies. But the stock market remains very high, the unemployment rate is low, and the housing market in some parts of the country has shown new signs of life, offering a mixed picture of the economy’s broader performance.

“We are not calling for a recession near term, but clearly the global and U.S. economies are slowing and recession risks as a result are rising,” said Owen Thomas, chief executive of Boston Properties on an earnings call Wednesday. “Central bank action in the U.S. and around the world should help, and low interest rates are a clear tailwind for commercial real estate.”

You Make the Call

  1. What are the motives or purposes for FED to lower rates? (10 points)
  2. What are the potential opportunities for the U.S. economics due to the decrease of rates? (10 points)
  3. Do you think the decrease of rates by FED would influence other countries (e.g., European countries)? Why? (10 points)
  4. Do you think it is a wise decision for FED to lower rates at this time? Why? (10 points)
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