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Submitted by Eric Hickman, president of Kessler Investment Advisors, Inc., an advisory firm located in Denver, Colorado specializing in U.S. Treasury bonds.
It isn’t just how much the Fed cuts rates that matters; it is how soon they do it.
But it doesn’t work that way.
Outside of a questionable psychological effect, the change in rate isn’t important, it is the level of the rate and for how long it persists. In fact, the Fed’s stimulative effect is more potent the sooner it is used, because lowering interest rates sooner will cost borrowers less than lowering them later.
Order - Scenarios - Scenario - Ammunition - Fed
In order to illustrate this, consider two scenarios. In the first scenario, “fire the ammunition,” the Fed cuts 0.25% at each of the next seven meetings to get down to the prior Fed low – a range of 0-0.25%. In the second scenario, “save the ammunition,” the Fed doesn’t cut rates again until March of next year and subsequently lowers 50 basis points three times, then 25...
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