Question for the Market

Question for everyone.

With the average of a broad swath of market rates (2yr +5yr+10yr+20yr) at 3.901 % and Fed funds at 5.181 % what do you think will happen to market rates if Fed cuts the funds rate by half a point to 4.68 % at the next meeting?

So, I posed this Question posed to Microsoft Co-Pilot AI:

A broad array of market interest rates are well below the historical norm versus fed fund rates, what should one expect if fed fund rates decline?

Here is the AI answer which I would say is pretty much what the market is saying. How the stock and bond markets react is another question as they have already over-anticipated. I think FF rates under 3.5 % down the road are in a historically rare status.

If the Federal Reserve decides to lower the federal funds rate, several potential outcomes could occur, especially given that many market interest rates are already below historical norms:

1. Lower Borrowing Costs: A decline in the fed funds rate typically leads to lower interest rates on loans and mortgages. This can make borrowing cheaper for consumers and businesses, potentially stimulating spending and investment.
2. Increased Economic Activity: Lower borrowing costs can boost economic activity as businesses invest in expansion and consumers increase spending. This can help support economic growth, especially if the economy is showing signs of slowing down.
3. Impact on Savings: While lower interest rates can benefit borrowers, they can also reduce the returns on savings accounts and other fixed-income investments. Savers might see lower yields on their deposits and bonds.
4. Stock Market Reaction: Lower interest rates can make equities more attractive compared to bonds, potentially leading to a rise in stock prices. Investors might seek higher returns in the stock market due to lower yields on fixed-income investments.
5. Currency Depreciation: A reduction in interest rates can lead to a weaker currency, as lower rates can reduce the attractiveness of holding that currency. This can make exports cheaper and more competitive internationally, but it can also increase the cost of imports.
6. Inflationary Pressures: If the economy is already operating near full capacity, lower interest rates could lead to higher inflation. The Fed typically monitors inflation closely and adjusts rates to keep it within a target range.

Overall, the specific impacts will depend on the broader economic context and how other factors, such as consumer confidence and global economic conditions, interact with the change in the fed funds rate