Will the Fed make a rate cut today? - July 31, 2019
There might be another Fed rate cut soon, even today, which would be followed by two others. We – and many others – believe that it’s a strange time to take such a step. Still, from an investor’s point of view, it may have some advantages: with some good ideas, it’s possible to profit of it.
The Federal Reserve’s monthly meeting ends today, and many expect a rate cut from the Committee. Some even go as far as believing a 50 basis point cut may come. We, and some others, believe that such a cut is a strange step from the Fed. Nonetheless, they have good reasons for it.
Investors want it
The main reason behind the expected rate cut is that investors expect, or better put, want it. President Donald Trump also would like to see a cut, even a huge one. (European Union is leaning for a cut, too, and planning to relaunch QE programs.)
This is due to two things. First, they want one of the longest bull runs of the American stock market to continue. Second, the US economy is a bit weaker than it was last year. GDP growth was under what was expected. Not badly, but the economy still underperformed. (Trade war with China doesn’t help either, even if it’s basically on hold now.) Although numbers are far from bad, investors would like to see some financial stimulus (re)introduced to the market.
Reintroduction is the right word, since Fed kept interest rates low for almost a decade after the financial crisis. They waited until December 2016 with their first hike. Post-crisis, low interest rates and strengthening stock markets were doing a lot of good to investors. They might want to go back to that era again.
The economy doesn’t need it now
The problem is that the economy doesn’t really need a rate cut and the stimulus that comes with it now. It is true that the economy isn’t as strong as last year, but it’s still “in a good place” as Fed’s Jerome Powell usually says. What’s more, stock markets are also at an all times high, which again, contradicts the need for a cut rate.
Cuts usually don’t come when stock markets are this strong and the economy (especially unemployment and inflation) is also performing this good. This preemptive decision may also weaken the Fed’s chances to take further steps when they are really needed.
We have also underlined several times that super low rates can easily hurt the economy (see: The trap of negative interest rates). When rates are close to zero, savings can easily lose their value. During these times, people often turn to riskier investments to do something with their money. (This might have been one of the reasons behind the success of Bitcoin and other cryptocurrencies.)
Benefitting from a bad decision
Although we firmly believe that a rate cut is (to say the least) a strange idea, it can have some positive outcomes for investors. First of all, this may bring some great opportunities to the stock markets to those who have higher risk tolerance and deep economic knowledge. Even precomposed portfolios with higher returns and risks might be a good idea for those who dare.
For people who want something safer, long-term investment strategies, government bonds and gold might be the perfect idea during this time. Gold already started to strengthen, also because of the expected rate hike (see: Is this the uptrend in gold we’ve been waiting for?). During economic changes, precious metals are usually great choices as they are safe, yet still profitable instruments.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.