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There was no bigger news in the financial world this week than the 50 basis point cut to the federal funds rate. The cut is the first reduction in interest rates in 4 years. The move signals that the Fed believes it has finally tamed inflation. In this week’s quiz we will pose questions around what usually happens following a rate cute.

Question 1

Question 2

Question 3

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Answers

Question 1

Answer: B

Mortgage rates have already come down significantly from their peak this cycle. However, a lower federal funds rate should help to decrease rates even more in the coming months. Expect to see more offers for home refinances as well as those who locked in high rates over the past few years look to refinance at lower prices.

Question 2

Answer: A

Prices of recently issued 2-year treasuries should increase in price. This is because investors will value the higher yield on these treasuries versus the lower coupons on newly issued treasuries.

Question 3

Answer: A

It’s important to note that falling rates do not guarantee that stock prices go up. If the economic situation looks bleak, stock prices can still fall precipitously. However, generally speaking lowering rates will mean stock prices will increase. This is because lowering interest rates means cheaper borrowing cost for companies and consumers. As a result, companies and consumers borrow money to invest in more items, services, and assets.