Rate Cut Rumblings
Jerome Powell, Chairman of the Federal Reserve, has said that a cut to interest rates is on the table. He didn’t say much else, but that was all it took to make Wall Street pop.
The ‘Fed’ is the United States’ central bank (the banks’ bank), and it’s in charge of the supply of money to the economy. Cutting interest rates makes loans cheaper, so Americans are incentivized to take risks, invest, and do business! All that is good for the stock market. The Dow rallied 2.06% by the close yesterday, with the rest of the world’s major exchanges following suit. But all those gains are built on flash, not fire. A rate cut has not been officially announced, and it was only in the latter stages of last year that we were biting our nails over a possible increase in interest rates.
Powell will only reward the cut if the economy needs it, not if it wants it. He’ll be watching how bad trade war tensions become, how low inflation stays, and how slow long-term growth looks. It’s no light decision and it won’t be rushed, but if anything, domestic economics might be Powell’s tipping point. Job growth in May came in way under expectations. Citing that amongst its factors, Barclays Bank has suggested a double rate cut this year!
All-in-all, if a real recession comes along, the Federal Reserve will need to cut rates to re-stimulate the economy. Realistically, it can only cut as low as 0%, and the security of having rates to drop further down is critical to investors in stocks. The Central bank meets on the 18th to mull this over. We’re glad it’s not us!
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