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US Federal Reserve Cut Interest Rates for the First Time Since 2008

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

On the 31 July 2019 2.00pm (EDT, US), the FED decided to cut interest rates by 25 basis points from a range of 2.50 – 2.25 per cent to 2.25 – 2.00 per cent.

Jerome-Powell

There are a few key points on why this decision was reached. These include:

  1. Continued trade war tensions between the US and China is creating further uncertainty for US companies. This ongoing uncertainty is making some companies more cautious about their capital spending.
  2. Core inflation (excluding energy and food prices) has been steady at around 1.6 per cent over the last 12 months. This is below the FED’s target of 2.00 per cent inflation.
  3. Wages are seen to be steadily rising, but not at the rate that can put upward pressure on inflation to reach the 2 per cent target.

Additionally, the Chairman of the FED Jerome Powell stated that this rate cut is a “mid-cycle adjustment to policy” and that this “is not the beginning of a long series of rate cuts”. These words dampened market expectations of a number of reductions over the next six months or so.

In response to this announcement, the Dow Jones at 2.00pm was at 27,211 points and then dropped to finish the day at 26,860 or a drop of 1.3 per cent. Further, the $US/$A exchange rate weakened to 0.6830 cents on the back of a strengthening $US.

The Australian market has also dropped today (11.00am, 1 August 2019) by a more modest 0.3 per cent. Gold stocks in particular fall sharply (around 5 per cent). The question arises whether the Reserve Bank Board may now take a more cautious approach to cash rate reductions going forward.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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