Everything you need to know before the Fed cuts rates

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Understand the background and purpose of rate cuts

The Fed usually cuts rates to respond to economic slowdowns, 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. Therefore, the rate cut may not be large and may not last long.

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Current economic conditions

The Fed's rate cut decisions usually take into account the current inflation level, labor market conditions, and economic growth prospects. The current market generally expects the Fed to start cutting rates in September. Current economic data show signs of easing inflationary pressures and cooling of the labor market. Despite the slowdown in growth, the US economy is expected to avoid a recession and achieve a soft landing.

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Differences between market expectations and actual actions

Market expectations of the Fed's rate cuts will affect stock prices, but 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 them less than expected. When actual rate cuts are less than expected, it may trigger a stock market decline.

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Bad signals to watch out for when cutting interest rates

The Fed's interest rate cuts are often seen as a sign of poor economic conditions. If the rate cut is to address the risk of a recession, it may cause investors to worry about corporate earnings prospects, which will have a negative impact on the stock market. This rate cut is a preventive rate cut with little impact on the market. Referring to the rate cut in 2019, US stocks continued to hit new highs after a slight adjustment

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Improved liquidity

The 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.