Losing Interest

Q Are interest rates heading lower soon? — F.W., Chicago

A No one knows for sure, but it certainly looks like it. The Federal Reserve’s Federal Open Market Committee (FOMC) meets at least eight times a year and decides on any changes to America’s short-term monetary policy, most notably raising or lowering interest rates.

The most recent meeting was in March; the FOMC decided to leave interest rates unchanged, primarily because inflation, while down from recent levels, has not gotten close enough to the goal of 2% annually. Inflation, as measured by the consumer price index (CPI), was recently 3.2% — a little more than the average inflation rate over the past century, though the rate has sometimes been much higher or lower.

Assuming inflation keeps inching down, many expect the FOMC to enact several interest rate reductions this year. Those might begin as early as June, with a target federal funds rate between 4.5% and 4.75% by the end of the year, down from the current 5.25% to 5.5%. (The federal funds rate is the interest rate at which U.S. banks make overnight loans to each other.)

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Q How do tax inversions work? — D.F., Fayetteville, North Carolina

A A tax inversion, or corporate inversion, happens when a U.S. company becomes a subsidiary of a foreign company (in a country with more favorable corporate tax rates), though the U.S. branch of the company generally remains in charge. It’s a legal maneuver undertaken to shrink the U.S. company’s tax bill, but it has been heavily criticized for robbing the U.S. of significant tax revenue. An example is the medical device giant Medtronic, which bought the Irish health care concern Covidien in 2015 and is now legally headquartered in Ireland.

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