What’s the impact of the Fed’s 50 basis point rate cut?
The decision was highly anticipated and much of the benefit of the rate cut was already priced into the market. As such, we believe the near-term impact of the cut, while positive for the equity market, will be minimal.
What’s worth noting is the market’s expectation that this 50 basis point cut marks the beginning of a strong, linear cutting cycle. We believe this position is premature.
The economy, which has been strong, shows signs of continued growth. Inflation has been sticky, and as we’ve said in the past, we do not believe it has been fully tamed. Our expectation for continued strength in the economy would result in additional long-term inflationary pressures. These inflationary pressures, alongside economic growth, would not support an aggressive rate cutting schedule. Rate cuts along with sticky inflation also suggest transitioning further into a positive yield curve. It is interesting to note that the yield on the 10 year Treasury is currently 15 basis points above this week’s low reading.
In the near-term, there are segments of the market that will benefit from lower interest rates. An example can be found in housing, an important piece of GDP and a key contributor to consumer confidence. If mortgage rates drop below 6 percent, we could see a kick start in housing transactions. But this, also, is a potential inflationary force.
In summary, the 50 basis point rate cut is seen as a positive in the market today. While much of the associated benefit has already been priced in, it may spur activity in rate-sensitive segments. However, we are not convinced that this is the beginning of a strong easing cycle. Economic growth and inflation data will prove telling as we move forward.
The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.
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