SpaceX, Tesla, and X CEO Elon Musk called on the Federal Reserve Sunday to lower interest rates – an issue that is likely to become contentious, and consequential, in what’s left of this year’s presidential election campaign. Writing on his social media platform on Sunday, Musk said that the Fed “needs to drop rates,” adding that they have been “foolish” not to do so sooner.
The news comes as the United States looks down the barrel of an economic recession, with the global stock markets witnessing a dramatic decline on August 5. The sudden decline followed a policy meeting by the Feds last week, during which the central bank chose to keep the target interest rate at 5.25-5.5%. It means borrowers still face high rates on mortgages and other loans – the highest rate, in fact, for 23 years. The number has remained the same since last July, though some had speculated that the Fed could reduce the rates in the final months of the presidential election campaign.
Musk is one of many who argue that lowering rates would help get the economy moving again, encouraging people to buy homes and new cars at a time when spending has dropped.
What Happened to the Stock Market?
It wasn’t just the U.S. economy that was shook on August 5 – it was the world economy. Japanese stocks saw their biggest loss in 37 years, with the Nikkei 225 index dropping by more than 12%. The Nasdaq Composite also fell by 6% and the S&P 500 dropped by 4.25%.
There are several reasons why it happened, but one major factor is the state of the U.S. economy – the economy that President Joe Biden claims is stronger than ever. Experts believe that the economy is slowing faster than expected, and a jobs report revealed last week indicated that not enough Americans were getting back into the workforce. It means that businesses aren’t growing as quickly as the economy needs, and could indicate a potential slowdown in the coming months.
Why Interest Rates Matter
Interest rates matter, and for many reasons – but we’ll break it down into three key points.
First, there’s the matter of borrowing. Lowering interest rates encourages people to borrow. When the rates are low, people are more likely to take out a mortgage for a new home, buy a new car, or take out a loan for home improvements. Businesses benefit, too; lower rates mean businesses can borrow money to expand their operations or even hire more workers, which is good for jobs.
Then there’s the issue of monetary policy—and that’s a little more complicated. The nation’s central bank, the Federal Reserve, uses interest rates to control the economy during good times and bad. When the Feds adjust rates, they determine just how much people spend as consumers. The Feds don’t arbitrarily control the rates, mind; they exert this control to maintain stable prices and encourage maximum employment.
Thirdly, there’s the matter of the distribution of labor and resources. When interest rates are low, industries that rely on borrowing – like the construction trade – do well. Rising interest rates, however, cause problems for sectors that are more sensitive to borrowing costs, like the housing market.
So, is Musk right? Economists have differing opinions – but what we do know is that the Federal Reserve hasn’t ruled out lowering rates at their next meeting. And when that happens, mortgages will get less expensive, people may even refinance existing loans, and the cost of living might just begin to come down…a little.
