Fed Cuts Interest Rates: Markets React

In a move that was widely expected, the Federal Open Market Committee this week decided to lower the target federal funds rate. The move had been more or less forecast for weeks in advance, and recent economic data releases bolstered the Federal Reserve’s case for cutting rates.

What was surprising to many, however, was the fact that the Fed decided to cut the federal funds rate by 50 basis points (0.50%), rather than the 25 basis points (0.25%) that many people had expected. That brings the federal funds rate down to 4.75-5.00%.

With the last CPI inflation reading showing core inflation still stubbornly over 3%, and increasing more than expected, many had speculated that the Fed would stick to a 25 basis point cut rather than a 50 point cut.

Markets reacted as might be expected, with the Dow Jones jumping nearly 200 points on the news, the S&P 500 climbing nearly 30 points, and both gold and silver rising as well.

Stock markets greeted the news as a sign that the monetary spigots may be opening up again, while precious metals markets saw the rate cuts as a sign that the economy may be slowing down, setting up conditions beneficial for gold prices.

But all those gains were given up by the end of trading Wednesday, perhaps due to the growing realization that the 50 basis point cut was the first salvo at an attempt to stabilize an economy that is slowly heading toward recession.

What Will the Fed Do Now?

The question everyone has now is what the Fed will do next. For perspective, the Fed’s first rate cut in its 2007-08 rate cut cycle was also a 50 basis point cut, which was then followed by a series of 25 basis point cuts.

We might then expect further rate cuts at the next two FOMC meetings this year, which would bring the federal funds rate down to 4.25-4.50%.

This comports with the summary of projections released by the Fed, which shows that most FOMC participants expect the target federal funds rate to be between 4.25% and 4.75% by the end of the year.

Further rate cuts would then be expected next year, with most FOMC participants expecting the federal funds rate to be between 3.00% and 3.50% by the end of next year.

Of course, FOMC projections are notoriously inaccurate. Changing economic conditions result in the need for action, so in all likelihood the rate may end up being lower at the end of next year.

Shades of 2007 All Over Again

If this sounds a bit like 2007 all over again, that’s because it’s eerily similar. In 2007 the Fed made a 50 basis point cut at its September meeting. Stock markets went on to set all-time highs in early October, then began a long and gradual decline that accelerated in 2008 and reached its nadir in 2009.

Meanwhile the Fed continued to make periodic 25 basis point cuts, all while telling us the economy was doing just fine.

Granted, we haven’t had our Bear Stearns or Lehman moment yet (or have we?), so there doesn’t appear to be any single major driver of potential recession. But given the Fed’s track record on rate cuts, and the history of recession occurring shortly after the Fed’s last two major rate cut cycles, the question of recession is right at the front of many people’s minds.

The coming months will show whether the economy follows the same pattern it did back then. Every recession or financial crisis is different, but this one so far looks to follow the same pattern we saw back in 2007.

What Can You Do?

If the economy ends up in a crisis like that of 2008, we might expect to see the following: a gradual decline in stock markets later this year and early next year; rising gold and silver prices; and more signs of growing unemployment such as layoffs, buyouts, and return-to-office mandates.

We could be entering a period of time that is quite similar to that of 2007-08, and many Americans are woefully unprepared.

Debt levels are higher than ever, credit card delinquencies are rising, and we have yet to really feel the impact of higher interest rates on the commercial real estate market. A perfect storm of events is coming together that could result in another financial crisis as bad as 2008, or worse.

Are you one of the unprepared? Or have you seen this slow motion train wreck coming and started to prepare yourself against it?

Many Americans have already seen the writing on the wall, and have started to move their wealth into precious metals like gold and silver. Both gold and silver performed well during the aftermath of the 2008 crisis, and gold gained 25% during the same time period that markets fell more than 50% (October 2007 to March 2009).

You don’t have to leave yourself at the mercy of financial markets, you can try to safeguard your savings and investments in whichever way you see fit. And gold and silver can be one way of doing that.

With a gold IRA or silver IRA you can benefit from gains in gold and silver prices while still enjoying the same tax advantages of an IRA account. And you can fund your gold IRA or silver IRA with a tax-free rollover from existing 401(k), 403(b), TSP, IRA, or similar retirement accounts, helping you secure your retirement savings by owning physical gold or silver coins or bars in a precious metals IRA.

Now that the Fed has commenced its rate cut cycle, the countdown has started. There isn’t an unlimited amount of time for you to secure your financial well-being if the economy continues toward recession.

If you want to look at ways to help preserve your hard-earned money in the face of a looming downturn, call Goldco today to learn about how gold and silver can help.