Federal Reserve Could Cut Rates by 25 Basis Points
Stocks are high now but could be pushed even higher by a new rate cut, although that may not be the best move.
Quick overview
- Markets are expecting a 25 basis point rate cut from the Federal Reserve next week, contributing to the Nasdaq reaching an all-time high.
- While a rate cut could stimulate the economy and benefit consumers, concerns remain due to persistent inflation and recent negative jobs data.
- There is skepticism about the timing of a rate cut, as the stock market is already near record highs, potentially limiting the expected positive impact.
- Experts warn that a rate cut might not address underlying economic issues and could lead to a quick market dip after an initial surge.
Markets are anticipating a rate cut next week of 25 basis points from the Federal Reserve, which is why the Nasdaq stock index is at an all-time high.
The CME Group’s FedWatch tool shows that markets strongly anticipate a rate cut of about 25 points from the Fed next week. The next Fed interest rate policy meeting is scheduled for September 17th, and the sentiment is that the rate will be moved down to 400-425 points.
A dovish Fed could help to stimulate the economy and push the stock market higher. It could also help struggling citizens cut costs and earn more from their savings. The recent jobs data was not very positive, and it is because of that recent report that market sentiment is very hopeful right now that a rate cut will be announced.
Why a Rate Cut Might Not Be Beneficial
There is cause for concern with a new rate cut, even though there has not been one in about 9 months. Inflation is still high, up 2.7% over the last year. The Consumer Price Index (CPI) is also up 0.2% from month to month. The Federal Reserve has been holding out for inflation to decrease to issue a rate cut, which is why they have not enacted one all year.
However, longtime Fed chairman Jerome Powell is out, and President Donald Trump is trying to remove Fed governor Lisa Cook as well so that the remaining Fed members will vote more widely in his favor. Trump has been pushing for a rate cut for months, and the Fed has pushed back and told him that they do not think it is advisable.
The current Federal Reserve members may be more agreeable to rate cut, but this might be the wrong time to issue one. The stock market is nearing all-time highs. Both the S&P 500 and Nasdaq set record highs recently, with the Nasdaq setting a new high on Tuesday. The expected market surge that investors are hoping for from an interest rate cut may not happen with the current stock values being so high already.
We may be seeing the current ceiling on the stock market, or at least something very close to it. If the stock market were to surge significantly when a rate cut may be announced in a week’s time, it might not surge as high as expected. In addition, investors should be aware that the market may dip quickly after a strong upward swing, erasing much of the gains made.
On Monday, the chief investment strategist for Yardeni Research, Ed Yardeni, said that a Fed cut could stimulate the economy at a time when it does not need to be stimulated. That may cause stocks to melt up but not fix the labor supply issue.
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