What Happens if the Fed Cuts Rates to Zero - Or Goes Negative?

2 days ago

Key words and Definitions

Federal Reserve - the central bank of the United States charged with conducting monetary policy to keep prices stable and the economy growing.

Capital structure - a firm's mix of debt and equity.

Corporate bonds - long-term debt issued by corporations to finance operations and/or growth.

Summary: Key Points in the Article.

U.S. interest rates remain higher than interest rates in most other developed nations even after two recent Federal Reserve rate cuts. However, that fact may soon change given the Fed is under pressure to cut rates even more. Given that likelihood, some wonder how far rates will fall. As a comparison, both the European Central Bank and the Bank of Japan have pushed interest rates negative.

Factors that affect the Fed's interest rate decision include a weakening U.S. economy and a faltering stock market. However, most experts are quick to point out that conditions are not dire. Unemployment rates are near historic lows and the economy is still growing. Despite these facts most experts believe the Fed will cut rates again at the October meeting.

Other experts believe the Fed will return to its policy of quantitative easing to push longer term rates lower. However, lower interest rates discourage savers and harm anyone with retirement savings invested heavily in bonds. At the extreme, negative interest rates would push earnings down for financial institutions.

For complete story, click the link below:

https://www.cnn.com/2019/10/03/investing/federal-reserve-interest-rates-zero-negative/index.html

Thinking Critically Questions:

1. How do earnings impact a firm's value?
2. How do external credit rating agencies affect bond coupon rates?
3. How do interest rates affect a firm's capital structure?