How would a Federal Reserve rate cut affect equity markets?
A quarter-point cut is baked in. But a half-point? The market likely would love that.
Published July 15 2019
I'm Linda Duessel, Senior Equity Strategist at Federated Investors.
How would a Federal Reserve rate cut impact equity markets?
Right now the markets expect that you will have a quarter point cut at the July meetings, of 100% expectation for that to occur. If that occurs, it's already priced into the market, what is debatable is if they do a 50-basis point cut. Does a 50 basis point cut mean that they know something is really dangerously bad about the economy and is a recession coming down the pike? Or alternatively, would a 50 basis point cut and some remarks indicate that the Fed, which normally does not want to get in the way of political season in 2020 says, we're going to give you the 50 now, and we're going in, we're going to stay at bay for the time being. I think the market would like that very much, and I also think that the market may not appreciate the fact that today the term premium, which is the amount that we as investors ask, extra yield to invest our money long term versus short term, the term premium today is at a negative place. It's not been negative since the early 1960s, and the only thing those two periods have in common is low inflation and the Fed is at bay. That could be absolute Goldilocks if we head into the next year. The only thing I really don't want to hear is continued talk about the possibility that the United States would join other countries around the world with negative interest rates.
Views are as July 15, 2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Equity Management Company of Pennsylvania 19-20159 (7/19)