What Would An Interest Rate Cut Mean For Markets?

US markets have been battered with multiple pieces of bad news over the last few weeks with indicators pointing to possible recessions, or at least a significant slowdown in the rate of economic growth across the globe.

Many have pointed the finger at President Trump’s increasingly harsh rhetoric when it comes to tariffs he has imposed or is planning to impose on Mexico and China.

Fed Role

Yet, despite the general doom and gloom, markets in the US are continuing to perform very well, far better than they might be expected to, given the general economic picture.

This is largely because the Federal Reserve has started to imply that it may cut interest rates in the coming months in an attempt to shield the US economy from the impact of an economic slowdown.

This is a significant reversal from earlier this year when the Fed was suggesting that it planned to further raise interest rates in an attempt to keep a check on economic growth and inflation and ensure that its armoury is well stocked for the next recession.

This has immediately boosted stocks in a number of sectors such as banking, it has even delivered a small boost to the technology sector, which has been hit particularly hard by talk of tariffs.

Will The Fed’s Actions Make A Difference?

The Federal Reserve has more limited room for manoeuvre than it usually would at this point in the economic cycle. This is because interest rates have not returned to their normal levels following the Financial Crisis.

This means that while the Fed may be able to deliver a short term boost to the value of shares and the American economy in general, it may run out of road before the current economic malaise is entirely eliminated.

This may create advantages for short sellers later on in the year if the Fed’s actions are unable to stem the tide of negative news. With an unpredictable president in the White House, this could be a roller-coaster of a year.