The Federal Reserve Board gave the economy a pleasant surprise today (April 18): a 1/2% interest rate cut.
The Fed’s action most likely will lead major banks to lower their benchmark prime interest rates to 7.5% as soon as possible.
A 7.5% prime rate would be the lowest since the summer of 1994.
The rate cut was unexpected because the Fed’s next regularly scheduled meeting is not until May 15.
However, the Fed decided to act because corporate profits and investments by businesses “continued to soften.” Weak profit outlooks and low levels of investment “threatens to keep the pace of economic activity unacceptably weak,” according to the statement issued today by the Fed.
High interest rates had a particularly damaging impact on the RV industry last year. Some major dealers went out of business, in part, because of high interest expenses, and many dealers became reluctant to replenish their inventories on a one-for-one basis due to high floorplan finance costs.
On the subject of business inventories, the Fed stated today, “A significant reduction in excess inventories seems well advanced.”
The shrinkage of business inventories to more sustainable levels, combined with a continued growth in worker productivity led the Fed to believe that it could lower interest rates again without sparking higher rates of inflation.