What causes interest rate cuts? It’s safe to say that an economic recession is not the only reason the government cuts interest rates.
This is good news for investors like yourself. It means when the government cuts interest rates, it is not a warning sign that the economy is collapsing.
So what causes interest rate cuts? Although many considerations likely go into the Federal Reserve’s interest rate choices, there are a few key reasons the government might decide to make such cuts. Some of these potential reasons could have big implications for your real estate investments.
Interest Rates Are Lowered To Increase Consumption
Let’s get the big issue out of the way first: Yes, sometimes poor economic conditions are what cause the government to lower interest rates.
That’s because people consume more when interest rates are low.
More money leads to more consumption. It’s proven!
So the government likes to lower interest rates to get the economy moving again.
A recent study put out by the Norwegian School of Economics found that lowering interest rates leads households to take on more debt and spend more. It gets the economy moving faster.
It’s an easy tool the government has at its disposal.
But sadly, it’s a tool that must be used sparingly. Otherwise, the government will just keep lowering the interest rate until it’s zero. Then they won’t have any tricks to respond to poor economic conditions after that! So they must be very careful about when they can lower interest rates to give the economy an extra boost.
Interest Rates Are Lowered When Real Estate Is Overpriced
If houses aren’t selling as they should in the real estate market, there’s likely a good chance that interest rates are about to be lowered.
But just because interest rates are cut doesn’t automatically mean that housing is about to get more expensive. It could make homes more affordable.
That’s because high interest rates sometimes “price out” people who are trying to buy a house.
Why? Because it makes a $100,000 house more expensive.
After all, buying a $100,000 home at a 3% interest rate is far more affordable than buying one at a 7% interest rate. But the house is still only listed at $100,000.
Contrary to what you might think, housing prices don’t automatically go up when interest rates go down.
The research shows that monetary policy such as interest rate changes has very little impact on housing prices themselves. So when interest rates are lowered, it might just be the government’s way of making houses more affordable for the general citizen.
Interest Rates Are Lowered After Being Increased Too Much
This is one of the most relevant explanations describing today’s interest rates.
As interest rates continue to be hiked by the Federal Reserve to unsustainable levels over 7%, the matter of lowering interest rates comes down to practicality. Sometimes the government increases interest rates too quickly because an interest rate is a delicate tool. If the rate hikes become too high, sometimes they do more than “cool down” the economy.
But that’s good news for you. Because the government can always just lower interest rates afterward. The Federal Reserve still maintains some element of control.
The Takeaway
It’s not a bad sign when interest rates go down.
Cutting rates doesn’t even imply the economy is headed for a recession!
Instead, interest rates are just a tool to control the economy, making it safer and more stable for investors like yourself.
This is good news for you. It means you can likely make money regardless of what interest rates are as long as you factor them into your investments.
That’s why we built Rental Property Calculator. We wanted to create a tool that gives investors like you the information you need to make the right decisions. Check it out and see how much wealth you can generate with your rental property.