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Interest Rates, Spoiled Investors and the Federal Reserve

Relative market tranquility rests on unrealistic expectations for rate cuts

A rate cut, a rate cut! My kingdom for a rate cut!

With apologies to Shakespeare’s Richard III, that quote does seem to capture the sentiment of far too many investors and analysts, who have developed over the past month, an unhealthy and unrealistic expectation concerning not only the amount of the next imminent rate cut, but also as well, the number subsequently to follow.

In this regards, investors have taken leave of their senses. For a number of weeks, we have heard that not only is a rate cut after the Fed’s meeting at the end of the month a certainty, but also, that it will be at least 50 basis points — that’s a ½ point cut. And, the factual basis for this fanciful assertion? There is none.

It is wonderful to watch how the conventional wisdom on the Street work its way through analysts, economists and financial journalists. It is especially great fun to 

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observe the absence of reasoning or rational thought that forms the basis for these predictions. Are any of these stock market-centric gurus of monetary policy aware that there isn’t a lot of room left to cut rates?

With economic signals having been mixed for the past two months, how can anyone confidently predict that a 50 basis point cut is needed or can be justified?

The most recent data indicates an economy that is still chugging along, primarily buoyed by strong consumer spending. This offsets the low business investment in R&D and other capital spending, mostly due to American businesses inability to accept the ineluctable fact that there isn’t going to be any grand trade bargain with China.

Based on the current health of the economy, where do investors get the idea that a ½ point cut is warranted? The Fed did signal a rate cut, but intimated nothing about it being any more than ¼ point.

Here is the unvarnished truth: crybaby investors, spoiled by a decade of easy money and historically unprecedented low interest rates, have become acclimated to the low rate environment and expect that it will continue indefinitely and as such, are prone to making uninformed investment decisions, by ignoring the traditional risk/reward matrix.

Once investors catch wind that the Fed will cut rates, many then rush into riskier assets. The Fed’s reluctance to raise rates, has incentivized investors to migrate to other assets, with enhanced exposure, in the hunt for better returns.

Many investors act as if Fed chairman, Jerome Powell, were nothing more than a Marionette doll, whose strings they control, by signaling dire market corrections will ensue should low rates not continue ad infinitum. It will be interesting to see what happens to the market should the Fed announce no further rate cuts are in the offing.

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