President Trump has been highly critical of Fed rate hikes over the past year, and has been “pushing” them for cutting in recent times.
So, as anticipated, Fed cut interest rate by 0.25. This is the first cut since 2008.
On top of that, Fed’s post-meeting statement left opened door for future rate cuts in coming months. Powell said that this is “mid-cycle adjustment” and “not the beginning of a long series of cuts” ,but it may not be “just one”.
The Fed also announced that the process of reversing its quantitative easing program by letting bonds on its balance sheet mature would end. This comes about two months earlier than previously said.
Trump said that he is not satisfied with new measures form Fed. He criticized Fed and Powell, again, and insisted that the dollar is too strong.
It`s looks like the Fed have some pattern to cut rates after some form of crisis threatens the economy. In 2001 it was the tech, and in 2007 it was mortgage crisis. This time it may be that the trade wars are providing the biggest single threat.
Question is, did Fed take out some insurance with this move?
Fed`s decision can be a greater willingness to take some risks with higher inflation as opposed to deflation.
For the Fed, it appears that it’s easier to control a inflation than a deflation. Therefore they will likely to cut rates further. Maybe in September we can see one more 0.25 cut.
However, the recession in the US isn`t near. Yes, the yield curve is showing warning signs, but the excesses that precede recessions are not present.
The main threats to this one and future cuts is relate to US trade wars and tensions with Iran.
The rate cuts are in general good for stocks markets. Lower rates help boost economic and profit growth and make stocks relatively more attractive than cash.
The S&P 500 rose 55% in 5Y and 19% YTD. In last 12 months S&P 500 is up 6.16%. The exceptions were market has dropped after cuts was in 1981, 2001 and 2007, which were associated with recessions.
So, if the US avoids a recession, then interest rate cuts should be positive for markets. Yesterday`s reaction in stocks falls are from the reason cause the Fed wasn’t as dovish as hoped. Right now futures are slightly higher.
For us, it is likely to see some higher prices on a 6 to 12 months time horizon.
Source, charts by Tradingview