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The Federal Reserve cuts interest rates again by 0.25%
The Federal Reserve finds itself in a no-win situation. Criticism is running heavy in both directions. The market bulls and Trump administration want faster rate cuts to get ahead of a slowing global economy while a large wave of market participants wonder why we are cutting rates at all given the positive economic backdrop. In either case, Federal Reserve Chairman Jerome Powell continues to march forward with a “data dependent” outlook on policy. The Federal Reserve cut its target rate last week, as expected, by 0.25% to a range of 1.75% to 2.00%. This was the second rate cut of 2019.
Future rate cuts are uncertain at best. At this point in the cycle, should the Federal Reserve be cutting rates? Certainly, some of the Federal Reserve Committee members don’t believe so. It is important to remember that never in its history has the Federal Reserve cut interest rates alongside economic data that has generally been this positive. GDP is well in positive territory, the employment situation remains strong, consumer sentiment is still well above recessionary levels and the heartbeat of the U.S. economy, consumer spending, is still very positive. Needless to say, the future of monetary policy is complicated! On the one hand, the Federal Reserve argues that inflation is below target levels giving them room to be accommodative. On the other hand, if the Federal Reserve keeps future interest rate cuts on the table in the near-term, what tools and ammunition will be available to fight off an eventual recession?
Aside from the monetary policy outlook, what does each rate cut signify for investors and consumers? For investors it means getting ahead of an inverted yield curve which has preceded several of the past recessions by a certain lag time. As we write, the yield curve is extremely flat, and we have recently escaped some brief moments where the yield curve did technically invert. A steeper yield curve would be a welcome sight to investors reducing the anxiety related to a very reliable historical recession indicator.
Consumers looking to invest or borrow would welcome lower rates to take advantage of financing opportunities such as expanding a business, buying a home or automobile or possibly refinancing higher yielding debt. The unfortunate consequence of lower rates for the consumer would be reduced savings rates. Changing the federal funds rate influences the money supply that begins with banks then eventually trickles down to consumers. This means eventual lower rates on savings deposits and other lower risk investments like money markets.
At Coral Gables Trust, we constantly meet with and educate our clients on these exact issues and how they may affect their wellbeing. We are bound to see more market volatility in the months ahead around monetary policy direction and our Investment Committee stands ready to make adjustments in our asset allocation if needed.
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