Two Reasons Why the Fed Needs to Cut Rates

I blame the Federal Reserve for the horrible start to August.

The reality is the central bank should have cut key interest rates at last Wednesday’s July Federal Open Market Committee (FOMC) meeting.

As I discussed in last Friday’s Market 360, even former New York Fed President Bill Dudley and Alan Blinder, the former vice chairman of the Fed, were calling for rate cuts. But as we know, the Federal Reserve did not listen to their elders. I was so frustrated with the Fed that I wrote an opinion piece for MarketWatch demanding that the Fed cut key interest rates by 0.5% before its Kansas City Fed meeting at Jackson Hole, Wyoming, in late August.

In yesterday’s Breakthrough Stocks Monthly Issue for August, I revealed three reasons for why the Fed needs to cut key rates sooner rather than later. (If you’re a Breakthrough Stocks subscriber, you can read it here.) So, in today’s Market 360, I’d like to share two. (Sign up here to become a member of Breakthrough Stocks for the third reason. You’ll also receive my brand-new stock recommendation.)

I’ll also explain how the market is likely to respond once the Fed does cut rates… and the stocks investors should invest in to properly position their portfolios now.

Reason No. 1: Coordinated Global Central Bank Cuts

Recession fears are certainly a big reason why the Fed needs to act sooner rather than later, but it’s not the only reason why a key interest rate cut before the Fed’s policy meeting in September may be likely.

Earlier this year I called for coordinated rate cuts by global central banks. Well, our Fed seems to be one of the sole holdouts, as several major central banks around the world cut key interest rates this summer and are signaling further rate cuts this year.

The Bank of Canada (BOC) has already cut key interest rates twice, with a 0.25% rate cut in June and a 0.25% rate cut in July. And given the close relationship that Canada has with the U.S., it is aware that our economic woes could cross the border. So, the BOC is expected to cut rates at each of its upcoming policy meetings and to bring its rate down to 3.5% by January.

The Bank of England (BOE) cut rates for the first time on August 1, bringing its key interest rate down by 0.25% to 5%. The decision wasn’t unanimous, but the BOE did signal that more rate cuts are coming, with many anticipating two more rate cuts by the end of the year.

The European Central Bank (ECB) cut key interest rates by 0.25% back in June, and then stood pat at its July policy meeting. The ECB will take an August hiatus, but it’s widely anticipated that Europe’s central bank will cut key interest rates again in September.

In my opinion, the Fed needs to mimic its global counterparts and start to cut key interest rates. But since it was hesitant to act this summer, the Fed may need to start with even bigger cuts.

Reason No. 2: A Collapse in Treasury Yields

Following the disappointing economic data over the past few weeks, Treasury yields collapsed.

The 10-year Treasury yield fell from 4.47% on July 24 to 3.8% on August 5, while the two-year Treasury yield dropped from 4.76% to 3.9% over the same period. Also notable is that the 10-year Treasury yield was as high as 4.7% in April, and the two-year Treasury yield peaked at 5.05% at the end of April.

Now, Treasury yields have firmed back up in recent days, with the 10-year Treasury yield at about 3.9% and the two-year Treasury at 4.05%. But the fact remains the Fed is grossly higher than market rates, and it rarely – if ever – fights market rates.

Given the drop in Treasury yields, the Fed needs to cut rates by 0.25% at least five times in order to get closer to market rates.

The bottom line: The Fed needs to act immediately.

Cash Ready to Flood Into the Stock Market

Right now, there are trillions of dollars of cash parked in money market accounts. The reality is with the stock market being so unpredictable, many folks started moving their money to cash. Nobody wants to lose their hard-earned money chasing stock gains when you could earn, say, 5% in a money market account.

However, that will change when the Fed cuts rates. The cash sitting on the sidelines should flood back into the market once people realize that they can no longer earn the high rates they once were in money market accounts.

And since these investors will be looking for higher returns, I expect them to turn to fundamentally superior small-cap stocks and select artificial intelligence stocks. I know the AI aspect might come as a surprise given the beating AI stocks have taken this month, but the reality is the AI Revolution is still underway and will only continue to gain momentum.

The truth of the matter is AI is on a completely different level, and it’s being adopted at an unprecedented scale. According to analysts at PwC, about 54% of companies have implemented generative AI in some areas of their business.

AI is expected to have a huge impact on the economy. By 2030, they estimate AI will contribute a whopping $15.7 trillion to the global economy. That’s about two-thirds of the current U.S. economy!

So, once the Fed “turbo charges” the market with its rate cuts, expect for fundamentally superior stocks and select AI stocks and companies that incorporate AI into their businesses to explode.

To prepare properly prepare your portfolio, join me at Breakthrough Stocks. It is chock-full of fundamentally superior stocks and AI or AI-related companies that should do well once the Fed cuts rates.

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Sincerely,