Features

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.

951_MW_federal-reserve

The US Federal Reserve has concentrated on placating investors

2014 Anadolu Agency

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.

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.

Serial bubble-blowing

Recommended

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
The booming jobs market points to inflation lasting for longer
Economy

The booming jobs market points to inflation lasting for longer

It’s a good time to be looking for a job, with plenty of vacancies and wages rising. But higher wagers are driving inflation up – and it’s not just a …
11 Jan 2022
What can the “January barometer” tell us about 2022 stockmarket prospects?
Investment strategy

What can the “January barometer” tell us about 2022 stockmarket prospects?

How the stockmarket performs in the first month of the year can often have a bearing on its performance for the remainder. Max King looks at what it’s…
10 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
Which investment trusts performed the best in 2021?
Investment trusts

Which investment trusts performed the best in 2021?

Shivani Khandekar runs through the top ten investment trusts of 2021 – and the worst performing trusts – and looks ahead to 2022.
7 Jan 2022
The booming jobs market points to inflation lasting for longer
Economy

The booming jobs market points to inflation lasting for longer

It’s a good time to be looking for a job, with plenty of vacancies and wages rising. But higher wagers are driving inflation up – and it’s not just a …
11 Jan 2022