Tomorrow marks a big day for the Federal Reserve. Chairman Jerome Powell will announce the Fed’s decision about whether to cut the federal funds rate.
Why is this such a big deal? The last time the Fed cut interest rates was in December 2008 during the financial collapse. Since then, the Fed has slowly increased rates as economic conditions have improved:
|Date||Change||New target rate|
|December 20, 2018||+ 0.25%||2.25% to 2.50%|
|September 27, 2018||+ 0.25%||2.00% to 2.25%|
|June 14, 2018||+ 0.25%||1.75% to 2.00%|
|March 22, 2018||+ 0.25%||1.50% to 1.75%|
|December 14, 2017||+ 0.25%||1.25% to 1.50%|
|June 15, 2017||+ 0.25%||1.00% to 1.25%|
|March 16, 2017||+ 0.25%||0.75% to 1.00%|
|December 15, 2016||+ 0.25%||0.50% to 0.75%|
|December 17, 2015||+ 0.25%||0.25% to 0.50%|
|December 16, 2008||-0.75% to -1.00%||0% to 0.25%|
In recent months, global tensions and fears of a slowing economy have prompted the Fed to consider cutting interest rates for the first time in over a decade.
Although a rate cut is not in the bag, the overwhelming expectation is that Chairman Powell will announce a decision tomorrow to cut interest rates by 25 basis points. If that does not happen, we could be in for no rate cut or a 50-basis point cut.
Adding to the excitement is that not all parties agree that a rate cut is necessary. Even amongst policymakers, there may be differing views. While some have indicated that a rate cut is critical due to global tensions and decelerated economic growth, others think the economy is doing reasonably well as it is and no economic stimulus is needed. Nobel Prize winner Robert Shiller even made a case for raising interest rates. President Trump has frequently weighed in, taking another opportunity today to vie for a large rate cut.
A decision by the Fed to cut interest rates would have widespread effects, impacting everything from borrowing rates to housing prices and consumer spending. If a federal funds rate cut happens, businesses may find it easier to borrow money and see increased demand for their products and services. This can also affect a company’s future planning and forecasts.
From an accounting perspective, accounting professionals need to understand the effects that a federal funds rate cut could have on the financial statements. For instance, a rate cut could impact valuations, impairments, debt arrangements, exchange rates, income taxes, and disclosures. The effects can be far reaching and material. Investors, board members, and other stakeholders may ask how a rate cut affects your financial statements. For those that have not yet considered the accounting consequences of a rate cut, the time is now. We discuss the possible accounting effects of a rate cut in The GAAP Reporter podcast, available through Spotify and Stitcher, as well as on our GAAP Reporter podcast page.
Regardless of what happens tomorrow, investors and analysts are already debating the direction of interest rates for the remainder of 2019 and beyond. After tomorrow’s meeting, the FOMC has three additional meetings scheduled between now and the end of the year. Each of these meetings could be another chance for a rate change. As such, the hype will undoubtedly pick up before each meeting. If you want to stay ahead of the hype, take a look at your financial statements and think about how a rate change could affect you. You’ll have one less last-minute headache before a financial reporting deadline.