The Federal Reserve and Chairman Jerome Powell have influenced stock market sentiment throughout much of 2018 and 2019. As the longest economic growth cycle in history begins to slow, many investors are looking to the Fed to provide stimulus in the form of rate cuts.
The hopefuls have received their wish in the last two Fed meetings, with the central bank announcing two consecutive quarter point decreases. The Fed will have its next two-day policy meeting from October 29 – 30, and most of Wall Street believes that a third consecutive cut is the most likely outcome.
Another Mild Rate Cut Could Sustain the Economy
According to research from CME Group, the Fed is likely to announce another cut at the end of this week. Analysts predict another quarter point cut to a range of 1.50% – 1.75%.
While the economy is still growing, its rate has slowed in recent quarters. Another rate cut could help to keep recession on the distant horizon.
For investors, a rate cut has a far more immediate impact. Sentiment is heavily based on Fed decisions, as has been seen in recent quarters. Cuts typically coincide with more confidence in the market. The low interest rate environment is one of the reasons why American stock markets have seen extended rallies throughout 2019.
Wall Street analysts believe that there’s a 93.5% chance of a rate cut being announced on Friday, and this creates expectation in the markets. If the analysts are wrong, then investors could pull back, sending stocks downwards. If they’re right, then it will be business as usual in this growing stock market.
The Danger of Too Many Rate Cuts
Of course, there is a danger to all these cuts. On the plus side, they can keep the economy and investment markets moving. On the negative side, they make returns from bonds and savings less competitive. There’s also a danger that going down too quickly before a recession will leave very little room for movement when the economy eventually contracts.
The alternative is that rates stay stable on Friday, which isn’t bad news for investors who don’t focus on policy speculation. Stocks have been incredibly strong all year, even with ongoing trade tensions between China and the United States.
A stable rate should not be feared by investors, especially those who are in the market for long-term dividend returns and retirement security.
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