Will the Fed’s Rate Cut Really Do Anything?
While the Federal Reserve’s rate cut last week was fully expected, the reasons behind it are increasingly unclear. At the post-FOMC press conference, Fed Chairman Jay Powell seemed to flip flop on whether this was a one-time deal,
“So we do think it will serve all of those goals, but again, we’re thinking of it as essentially in the nature of a midcycle adjustment to policy.”
or whether it was the first in a series of potential cuts that will take place over time,
“What I said was it’s not, it’s not the beginning of a long series of rate cuts. I didn’t say it was just one or anything like that.”
Naturally, that confusion in communication had markets fearing the worst. Many traders had already hoped for a 50 basis point cut and were disappointed at a cut of only 25 basis points. Then Chairman Powell seemed to indicate that the cut was just an “adjustment” rather than the first in a series of cuts. And then he said it wasn’t a one and done. So will the Fed cut again in September, or at all the rest of the year?
Markets reacted negatively to Powell’s comments, with the Dow Jones dropping several hundred points. That was compounded by President Trump’s comments on Thursday that he was placing tariffs on remaining Chinese imports, which led to another drop of nearly 300 points. Even positive job numbers on Friday couldn’t stop the Dow from sliding yet again.
It’s clear that the Fed’s rate cut won’t have any positive effect on the economy. All it will do is devalue the dollar and cut interest income for banks, savers, and investors. Lower borrowing costs won’t bring borrowers scrambling to borrow because they’re already tapped out, borrowing to the max to cover the price of expensive houses, high student loans, and pricey cars.
Now the Fed will feel the pressure even more. It’s almost as if President Trump is challenging the Fed to cut rates further. He’ll keep raising tariffs on Chinese goods, which will hurt stock markets. Then he’ll trot out the poor performance of stock markets and blame it on the Fed. And Powell will be under even more pressure to cut rates, despite the fact that Fed policymakers are split on whether further rate cuts are warranted.
The next few months will be a very interesting time for markets, and for investors too. In response to last week’s shenanigans, gold had a phenomenal week, gaining over $30 just on Thursday. With a faltering Fed and no hope for a trade deal, gold will only continue to climb in the future, rewarding those who made the decision to invest in gold when all of Wall Street thought stocks would continue to climb.