Investors await rescue by the US Federal Reserve

Investors are now counting on an interest-rate cut from the US Federal Reserve to bolster economic growth.


That's a bit more like it, says Ben Levisohn in Barron's. America's S&P 500 Index suffered its worst May in seven years last month, losing almost 7%. Last week, however, it bounced by 4.4%, its best five-day showing in over half a year. "You had a market that became very pessimistic and then all of a sudden we had the Fed's dovish rhetoric and no Mexican tariffs," Tom Essaye of wealth management group Sevens Report Research told CNBC.

Of these two factors, the US Federal Reserve is far more important than President Trump's deal with Mexico, which many analysts reckon he had secured before he threatened the tariffs in any case. Last week the chairman of the central bank, Jerome Powell, hinted that he was more inclined to cut interest rates than he had previously been. The threat of a trade war endures and weaker recent US economic data was underscored by an unexpectedly poor payrolls report. Employment increased by a mere 75,000 in May. Economists had pencilled in a rise of 185,000.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Investors are now counting on a rate cut to bolster economic growth; liquidity also tends to find its way into asset markets, portending a further boost. But in their "joy over the prospect of Fed easing", says Justin Lahart in The Wall Street Journal, investors seem to have forgotten that cuts occur "because something bad is happening". While easier money can engineer a soft landing for the economy, as in 1995, the start of rate-cutting cycles in January 2001 and September 2007 was followed by recessions. Cuts often come too late to temper a downturn.

Too early rather than too late?

Neither are "robust" household spending, unemployment at 50-year lows, and wages growing by 3.1% year-on-year. Tariffs resulting from a trade war, meanwhile, would tend to push up costs and inflation. So the Fed could well end up causing a jump in inflation, which it would then have to quell with rapid rate hikes a very nasty prospect for liquidity-addicted and overvalued stocks following a ten-year rally.

Advertisement - Article continues below



How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Most Popular


A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020
Buy to let

Come back buy-to-letters, all is forgiven

The government is winning its war against small private buy-to-let landlords. But who benefits?
23 Feb 2020
Pension tax

Why it makes sense to scrap higher-rate pensions tax relief

The point of pensions tax relief is to keep you out of the means-tested benefits system. The current system is ridiculously generous, says Merryn Some…
24 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019