Business Monday

Fed’s rate cut should bring higher wages: Opinion

On July 31, the Federal Reserve decided to cut interest rates for the first time in over a decade. The announced 0.25% reduction is considered confirmation of a notable perspective change by the Fed from just a few months ago.

The implications are far-reaching and impact virtually everyone in South Florida.

The Fed’s move is part of a global trend in central bank policies of moving toward further rate cuts in order to prolong the economic recovery that began after the 2008 Great Recession.

The most direct impact of such moves will likely be apparent when a business or individual takes out a loan. According to the Federal Financial Institutions Examination Council (FFIEC), in 2017, businesses in the metropolitan Miami area took out 53,611 loans totaling more than $880 million. While not all of these loans will have variable rates, a seemingly small move of 25 basis points — or 0.25% — could result in more than $2.2 million of reduced interest costs for South Florida businesses.

Maintaining the economic status quo would have a direct impact on the labor side of the equation for businesses as well. According to the Bureau of Labor Statistics, the national unemployment rate in June was 3.7%; in Miami-Dade County, it was 3.2%. Fewer qualified candidates for each available position increases the potential for increased wages — or in economic terms, wage inflation.

That potential wage inflation is what the Fed is striving to achieve given the current loose financial conditions and an unemployment rate which is at a 50-year low. Boosting wages and costs now should provide the Fed with more scope to cut real rates when the next recession occurs.

The long-term implications of a rate cut, as well as the possibility of additional future cuts, likely will depend on the economic data we see in the coming months. Financial markets are expecting a 1% total rate reduction before the end of 2020. Should the economy prove strong and inflation expectations start to rise, the current cut may turn out to be more of an “insurance” move rather than the start of an extensive easing trend.

On the flip side, should growth slow and the stock market turn downward, we could see the Fed deliver additional rate cuts in the face of further escalating trade tensions with China as opposed to today’s “prickly truce.” Given the fact that more than 55,000 small businesses in Florida are exporters, according to the Small Business Administration, trade tensions and their escalation could impact millions of Florida residents.

Carlos Lowell is Senior Vice President of Wealth Management and a financial advisor for The Lowell Group at UBS Financial Services Inc. in Coral Gables. He can be reached at carlos.lowell@ubs.com
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