Fed Limbo-ing Under Rates
How low can you go, Powell? It’s June 18th, day one of the US Federal Reserve meeting, and time for the Central Bank to either lower interest rates or not. Crunch time.
Lowering interest rates lowers the cost of doing business, great for the stock market. According to Barclays Bank, the stock market rocks when rates are cut in good times, rallying 21%. However, the same rate cut calls made amid recessions are viewed by the market as confirming evidence of a downturn, sending stocks plummeting 17% on average.
A decade on from the last major recession, the US economy continues to jet out positive signals to remind us of the fruitful expansion we’re in. However, investors have recently been trading underneath the dark, looming clouds of slowing growth rates, inverted yield curves, and trade tensions. Thus, we have two contrasting story lines, together making it hard to tell if Fed intervention is really needed. Chairman Jerome Powell and co are meeting today and tomorrow to decide which side of the fence they sit and whether interest rates indeed should be lowered.
In recent weeks, investors have gradually placed their bets on a rate cut. In fact, multiple cuts now appear to be priced into the stock market. David Lafferty, chief market strategist at Natixis Investment Managers, believes the Fed can’t forfeit to market demands for 2 or 3 cuts, as “that would be the Fed telling you a recession is coming.” Interest rates need to be high enough anyway, so the Central Bank has ample room underneath for drops in case of a market emergency. How the market might react to a Federal Reserve reality check will be interesting, to say the least. Keep an ear to the ground!