A Fed Rate Cut Looks Increasingly Likely… But That’s Not Necessarily a Good Thing


Fed rate cut - A Fed Rate Cut Looks Increasingly Likely… But That’s Not Necessarily a Good Thing

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After a great deal of back and forth, it seems likely that the Federal Reserve will cut its benchmark federal funds rate in the next few months. The labor market is cooling, and economic growth is slowing down. Real wage growth isn’t picking up, and consumers are starting to pull back after racking up a cumulative tab of more than $1 trillion in credit card debt. In other words, the Fed is starting to realize it needs to act.

Most recently, the latest numbers on initial jobless claims – the number of workers asking for unemployment benefits – reinforce the view that the Fed has enough “cover” to cut rates even with inflation still elevated above the central bank’s 2% target. It’s also worth emphasizing that the growth of GDP has slowed dramatically. The Atlanta Fed’s GDPNow model for the second quarter is at a paltry 2%. That’s not a terrible number, but it certainly isn’t a great one either.

This all sets the stage for the Fed to cut rates. But what happens if and when it actually does?

What Does a Fed Rate Cut Mean for Stocks?

Will the stock market cheer the Fed’s first rate cut, or will it treat the move as a negative?  

The narrative out there is that a Fed rate cut is a form of easing which will juice markets. This thinking lines up with the fact that lower-interest-rate environments benefit growth-oriented companies that are sensitive to borrowing costs. It is possible that this narrative plays out, particularly for small-cap stocks. However, it’s not a guarantee.

Historically, a Fed rate-cutting cycle tends to precede a large correction in equities or an outright recession. It’s not clear at this point if the Fed overdid its rate hikes. If it did, and if the stock market starts to panic in response to rate cuts, the central bank will follow suit.

At this point, we don’t know if a rate cut is coming this year or how the market would react. The one thing we do know is that the Fed isn’t omnipotent – it can’t predict tomorrow better than anyone else. That’s precisely the risk for stocks.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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