Europe’s economy has stalled. But an interest rate cut will likely have to wait for summer - WTOP News (2024)

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Europe’s economy has stalled. But an interest rate cut will likely have to wait for summer - WTOP News? ›

FRANKFURT, Germany (AP) — Inflation in Europe is way down from its painful double-digit peak, and the economy has stalled. But the European Central Bank left its key interest rate at a record high Thursday, and its leader suggested a much-anticipated cut to borrowing costs would likely wait until June.

Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and probably fuel higher stock prices, all of which could help accelerate growth. An even more robust economy might also benefit President Joe Biden's re-election campaign.

The Fed likely won't cut rates until after a recession strikes, research firm says. The Fed likely won't cut interest rates until after a recession arrives, according to GlobalData TS Lombard. The research firm said Fed Chair Powell is likely to fall into the trap of being reactionary when it comes to rate decisions.

1 While it usually takes at least 12 months for a change in this interest rate to have a widespread economic impact, the stock market's response to a change is often more immediate.

Higher interest rates are generally a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.

The opposite relationship is true for decreasing interest rates. That is, lower interest rates tend to decrease the value of a currency.

Workers. Rate cuts typically stimulate the economy because companies are more willing to invest, which bodes well for the labor market. “Having lower interest rates means firms are able to hire employees and invest in projects,” Davies said. Still, there could be economic curveballs in 2024.

Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on March 20, 2024. America's central bank doesn't see any signs of a recession on the horizon. Not this year nor the year after.

For people looking to buy a home, a recession can bring some advantages. When the economy is not doing well, home prices often drop, which can be good news for those who want to find a good deal; plus, during recessions, mortgage rates usually stay low, meaning buyers can get a home with lower monthly payments.

Though the economy occasionally sputtered in 2022, it has certainly been resilient — and now, in the second quarter of 2024, the U.S. is still not currently in a recession, according to a traditional definition.

Will interest rates go down if the economy crashes? ›

Do Interest Rates Rise or Fall in a Recession? Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.

As interest rates rise, the interest income from loans typically increases faster than the interest paid on deposits, leading to wider profit margins. Additionally, higher interest rates can boost the earnings of insurance companies and investment firms, as they often hold large portfolios of interest-sensitive assets.

Cons of the Federal Reserve

The Federal Reserve operates independently of the U.S. government, and its monetary policy decisions are not approved by Congress or the U.S. president. This independence helps the Fed operate free of political pressure, but it also limits the Fed's accountability.

The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.

Can interest rates be negative? Yes, interest rates can be negative. Some countries have already implemented a negative official interest rate. These countries include Switzerland, Sweden, Denmark and Japan, along with the euro area.

The general consensus among industry professionals is that mortgage rates will slowly decline in the last quarter of 2024. The projected declines have shrunk, though, in recent months. At the start of the year, for instance, Fannie Mae predicted rates would drop to 5.8%.

If rate cuts open the floodgates for spending, prices could rise faster than the Fed wants. For example, Americans who've been waiting for an opportunity to find good financing for a major purchase like a car could be motivated to start shopping, leading to more demand and potentially higher prices.

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down. But there is no guarantee as to how the market will react to any given interest rate change.

Lower interest rates make these alternative assets less appealing; driving investors towards gold, and increasing demand and the price accordingly. Gold is seen as a store of wealth for times of financial difficulty for this reason.