- On 18 September the Federal Reserve cut rates by half a point, more than many expected, in its first cut since March 2020.
- Money was getting cheaper on both sides of the Atlantic: with the Fed and the ECB on a path of cuts, borrowing was becoming less costly.
- With rates falling, holding excess cash once again has an opportunity cost: its size should be adjusted to what is really needed.
On 18 September 2024, the US Federal Reserve cut interest rates by half a point, more than many expected. It was its first cut since March 2020, closing a long period with rates at high levels. The decision did not affect only the United States: the dollar and US rates are a reference for nearly all markets. That is why what the central bank in Washington decides ends up reaching the financing costs of a small business in Catalonia.
A cut of half a point, double the usual quarter-point move, is a stronger signal than a minimal adjustment would have been. It indicates that the central bank considers the economy can bear cheaper money without inflation reigniting, or else that it wants to get ahead of a possible slowdown. Either reading has practical consequences for companies and families.
A bigger cut than expected
The surprise was in the size of the cut. Financial markets put a great deal of effort into anticipating these decisions, so a surprise in the size of the cut, even a modest one, shows up in prices at once. When the market had priced in a smaller cut, adjusting to a larger one means reviewing many positions in a short time.
That the cut exceeded forecasts does not mean the future path will be faster or that the economy is in worse shape. What it reveals is the importance of central bank communication and of prudence in interpreting it. Anyone planning on the basis of a specific cut should bear in mind that decisions are taken meeting by meeting and that data can change them.
Cheaper money
Money was getting cheaper on both sides of the Atlantic. With the Fed and the ECB on a path of cuts, financing and mortgages were becoming less costly, and conditions for borrowing were gradually improving. The effect is neither immediate nor uniform, but the direction of change is favourable for those who need credit.
This has consequences for specific decisions: the cost of refinancing a debt, of financing an investment or of buying a home with a mortgage. Even so, a lower rate does not turn a bad deal into a good one. It is worth calculating the ability to pay with room to spare, and checking that the project remains reasonable even if rates stayed somewhat above expectations. That prudence protects borrowers and lenders alike.
The opportunity cost
With rates falling, holding excess cash once again had an opportunity cost, that is, what one forgoes by leaving money idle. While rates were high, cash in deposits offered an attractive return; as they fall, that advantage shrinks and immobilised money becomes less attractive compared with other alternatives. That comparison, which used almost always to favour cash, now requires analysing each case with figures.
Liquidity still has its function as a reserve for the unexpected, but its size should be adjusted to what is really needed. A practical rule is to keep the equivalent of several months of expenses or fixed costs in reserve and to check whether the rest is placed in line with each person’s goals and time horizon. This note is general information, not investment advice, and an adviser can help specify it. Reviewing it once a year is usually enough.
Idle money also has a price.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
