Interest Rate Cuts – Salvation Or Damnation?
The comments below are an edited and abridged synopsis of an article by Kelsey Williams
The anticipation and speculation surrounding potential interest rate cuts have reached almost comical levels. Scratch that—it’s downright obsessive. Mainstream media and pundits relentlessly promote the possibility of rate cuts, regardless of the actual statements made (see Investors Re: Rate Cuts).
The expectation for at least one 1/4 point cut before the year’s end seems nearly universal, so let’s examine some pertinent questions:
WILL A RATE CUT MAKE ANY DIFFERENCE?
Unlikely. The stock market has surged on the mere expectation of a rate cut. While an official announcement might temporarily calm anxious investors, the tangible impact on the market will be minimal. Other markets have already priced in a rate cut to the extent possible, and any real boost would require a series of more substantial cuts. One or two rate cuts will still leave interest rates near forty-year highs. Any significant positive effects on economic activity will need a series of cuts more substantial than a single 1/4 point reduction.
WHAT IF CUTS ARE DELAYED OR POSTPONED?
Investors have shown remarkable patience regarding expected rate cuts. Any further delays could provoke significant selling, particularly in stocks. There’s a risk of a big selloff even if current expectations are met, as stock prices have already factored in the expected cut. Thus, a single cut before the year ends is probably necessary for stocks to maintain their lofty levels. Once an announcement is made, profit-taking becomes a strong possibility.
ARE CUTS NECESSARY?
Opinions vary. If you believe that Federal Reserve intervention in financial markets is expected and appropriate, you’re more likely to say ‘yes.’ However, there’s a strong argument for keeping interest rates stable or even increasing them further.
For four decades, the Federal Reserve maintained a policy of “lower for longer,” engineering interest rates to historically low levels, which arguably harmed the US dollar and financial markets. The change in interest rate policy two years ago aimed to support the US dollar and curb inflation effects.
In his recent testimony before Congress, Chair Powell noted progress toward the Fed’s 2% inflation target but expressed doubts about sustaining the trend. If so, why consider rate cuts now? Moreover, if lower inflation rates confirm this trend, justifying the campaign to restore interest rates to more historically normal levels, why should rate cuts be on the table at all?
In essence, why revert to past policies that led to chaos and destruction just because conditions appear temporarily improved?
CONCLUSION
One factor could force the Fed’s hand regarding a rate cut: the rapid deterioration in economic activity. Weakness is evident across various sectors, including retail sales, residential and commercial real estate, and durable goods orders. When the situation worsens enough to elicit loud complaints from citizens and politicians, the Fed might relent. However, don’t expect any potential rate cuts to have a positive impact. Their effect will be akin to firing blanks at a charging grizzly bear.
