What you need to know about the Fed's rate cut
1. Understand the background and purpose of the rate cut
The Fed usually cuts interest rates to respond to economic slowdown, reduce borrowing costs, and stimulate consumption and investment. The current rate cut is not due to an economic recession, but to ease the restrictiveness of monetary policy and the yield curve inversion problem.
2. Current economic conditions
The Fed's rate cut decision usually takes into account the current inflation level, labor market conditions and economic growth prospects. The current market generally expects the Fed to start cutting interest rates in September. The current economic data shows signs of easing inflationary pressures and cooling of the labor market. Despite the slowdown in growth, the US economy is expected to avoid recession and achieve a soft landing.
3. Differences between market expectations and actual actions
The market's expectations of the Fed's rate cuts will affect stock prices, but the actual rate cuts may not be in line with expectations. For example, recent economic data show that the US economy is still relatively strong, which may cause the Fed to postpone rate cuts or cut interest rates less than expected. When the actual rate cut is less than expected, it may trigger a stock market decline.
4. Bad signals to pay attention to when cutting interest rates
The Fed's rate cuts are often seen as a sign of poor economic conditions. If the interest rate cut is to deal with the risk of economic recession, it may cause investors to worry about corporate earnings prospects, which will have a negative impact on the stock market. This interest rate cut is a preventive interest rate cut with little impact on the market. Referring to the interest rate cut in 2019, the US stock market continued to hit new highs after a slight adjustment.
5. Improved liquidity
The interest rate cut will improve market liquidity, which may be beneficial to the stock market as a whole. Lower borrowing costs are good for small-cap stocks and the crypto market. It has driven up the prices of risky assets.
