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.
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.
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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
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
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