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Long Story Short: Was a Rate Reduction the Right Move?
Cut to the Chase: The Reality of Rate Cuts
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
The Federal Reserve cut its benchmark lending rate by a quarter point at the end of the Federal Open Market Committee meeting on Wednesday, which is the second rate cut in the last decade, following their last quarter-point cut on July 31 this year. Investors may now be searching for clues about the Fed’s future plans given Wednesday’s announcements.
Promising US Economic Data. Even though economies all over the globe are struggling, key performance indicators in the United States have remained strong. While certain sectors in the US have contracted, consumer spending and employment levels continue to be healthy. Because of this, investors are not entirely certain that another cut is the best decision. The Federal Reserve cuts rates with the hope that it will stimulate the economy, but the current economic data does not necessarily support this need. For this reason, economists are expecting the Fed to announce only one cut for the remainder of 2019. Either way, a reduction would cause a ripple effect in the economy and indirectly help the stock market by increasing consumers’ disposable income.
Weakening Global Growth. While positive trade news helped boost the market near record highs last week, uncertainty in major global economies has resulted in a volatile couple of months for US markets. Trade tensions have caused a contraction in manufacturing and overall inflation remains low. The Federal Reserve stated although US economic data has been strong, the possibility of a rate cut comes from the slowing that could come from elsewhere in the world.
Investors Taking on More Risk. When interest rates are low on bonds and savings accounts, investments are driven to the stock market and other riskier assets. A shift of more money going into these types of assets could push the prices higher and possibly lead to a crash that ripples through the economy. Price bubbles occurred during the dotcom meltdown in 2000 and the housing crash in 2007, ultimately leading to a recession. Fed officials said they do not yet see these assets turning into bubbles, and gains in the stock market will aid in continued economic growth.
Uncertain Future. Not everyone supports the rate cut, but many investors believe it will be great for the market. The main reason for Wednesday’s decision is continued uncertainty in foreign markets, but strong US data have economists skeptical. Although a reduction in rates may stimulate the economy for a short while, the long-term effect of investors taking on more risk is unknown.
https://www.usatoday.com/story/money/2019/08/20/trump-pushes-interest-rate-cut-but-would-hurt-help-economy/2058205001/, Paul Davidson, August 20, 2019
https://www.forbes.com/sites/sergeiklebnikov/2019/09/17/the-fed-looks-set-to-cut-rates-again-heres-what-to-watch-for/#2fa54cf595d5, Sergei Klebnikov, September 17, 2019
https://www.latimes.com/business/story/2019-09-17/fed-expected-to-cut-interest-rates-again-by-quarter-point, Don Lee, September 18, 2019
https://www.cnbc.com/2019/09/17/fed-expected-to-cut-rates-powell-may-have-hard-time-appeasing-critics.html, Patti Domm, September 17, 2019
https://www.cnbc.com/2019/09/17/fed-rate-cut-is-coming-but-corporations-still-doubt-its-necessity.html, Eric Rosenbaum, September 17, 2019
https://www.wsj.com/articles/fed-prepares-second-rate-cut-to-cushion-against-global-risks-11568799000, Nick Timiraos, September 18, 2019