The Federal Reserve Open Market Committee's decision Wednesday to lower the federal funds target rate to 2.25% from 2.5% marks the first time since September 2007 that the committee lowered the rate and the fifth time since 1990 that it initiated rate cuts.
A brief history of rate cuts and GDP
The most recent, and likely most famous, cut began at the dawn of the financial crisis after real GDP growth showed signs of slowing, falling to 1.8% in the second quarter of 2007 from 3.12% a year before. Current GDP growth is slowing, yet to a lesser degree. The latest reading was 2.29% on June 30, down from 3.2% a year ago, with the most significant drop occurring in the fourth quarter, falling to 2.52% on Dec. 31 from 3.13% on Sept. 30. That decline came amid a quarter where the S&P 500 lost 14%; however, 2019's bounce back has shown little relation to downward-trending economic growth.
Whether or not the cut will spur growth via cheaper borrowing rates is yet to be seen. The benchmark 10-year Treasury yield was already at 2% at Wednesday's close and is currently at 1.88%. Real GDP declined well below zero during the financial crisis. The rate settled at 0.25% by December 2008, implying that some lag does exist between interest rates and growth. However, the Fed can only do so much, and its up to borrowers to decide if further investment is worth the risk.