Could the Fed Do the Unthinkable?
Economic signals are easy to ignore until they’re not. For some investors, a macroeconomic analysis is very important, and depending on your perspective, a cut to interest rates could either be a catalyst to buy, or to sell.
Last week, factory activity dried up due to the trade war, and even the growth of the services sector slackened off. This week, data on job openings and mortgage applications are lined up for investors to pour-over. The market, as always, is sweating over risks to the global economy. Last week’s numbers acted as confirming evidence of how delicate markets could be right now.
When interest rates are cut, stocks live a little longer. In announcing a rate cut, Federal Reserve Chair Jerome Powell effectively gives the business world a motivational speech. He rouses investors to take risks and drive the economy by lowering the cost of borrowing money. Today, the debate is over between saving and investing. Savers have never suffered such a long spell of low interest rates on their nest eggs, while stocks have ballooned since the financial crisis of 2008. No economists predicted this, and no economists dare predict how it will end.
So, to cut or not to cut? Interest rates pose a philosophical question. The Fed could do what is expected of it, and surrender to these short-term indicators. That cut would keep investors happy, but the dark unknown of this long period of low rates would continue. Alternatively, the Fed could do the unthinkable. It could raise rates, and trade near-term turmoil for a long-term reset of rates that it knows how to manage.
Whatever JayPow’s decision, the market should stay afloat until at-least his next speech. Then, God only knows!