The Federal Reserve released its latest policy decision Wednesday afternoon, and lately there hasn’t been anything too noteworthy in these things – but that’s certainly not the case this time around.
I say this even though the Fed decided to cut rates by 25 basis points, just as I’d expected. But, as I mentioned in my exclusive Platinum Growth Club Live Chat Event on Monday, the Fed statement is everything. In other words, what economic reasoning do they give for their decision?
While I was hoping that the Fed would, as usual, simply cite “global events” – and there have been plenty of those – the statement did hone in on certain U.S. economic matters. The Federal Open Market Committee (FOMC) is happy with what it sees in consumer spending, but its statement also noted that “business fixed investment and exports have weakened.”
So, one way to interpret Wednesday’s rate cut is as an attempt to bolster businesses’ confidence (and, thus, their capital investments). Another interpretation, of course, is that this is a deference to President Trump. He has been very vocal in his disapproval of Fed Chair Jerome Powell, and feels it was a mistake to have previously raised rates at all.
While President Trump did appoint Powell, the fact remains that the Federal Reserve was set up as an independent body. So, it made sense to me that the Fed would want to show that independence – namely, by “meeting him in the middle” and only cutting rates by a quarter. That’s just what they did.
That’s the context, but Fed Chair Powell portrayed this cut as something inevitable…given that “global capital markets are highly integrated.” I do think that’s something to keep in mind as well.
The question now is whether we’ll see further cuts. That is not at all certain, as already with this September cut, there were two “hawks” within the 7-to-3 vote that did not want to cut key interest rates at all. Not to mention that we received more good news Wednesday on the consumer side: strong data on housing starts and building permits.
I do expect Powell to balance all this with Trump’s wishes by cutting by another 0.25% in December. But this is less certain.
The bottom line is, even if they make that additional cut, the Federal Funds Rate would still be 1.5%–1.75% – while rates overseas have, in many cases, turned negative.
At Growth Investor, I’m often asked how central banks can offer negative yields. And the answer is simple: because the central banks are printing money and buying their bonds themselves. The smart investors don’t do that, but central banks do. So this is really weighing on the Fed – the fact that their colleagues overseas, like Mario Draghi, decided that Europe could print all the money it wants as long as there’s no inflation.
I think Draghi really created a mess for himself. For one thing, it weakens the currency. And for another, it’s just a Band-Aid on weak economic growth. Then on Nov. 1, Draghi’s successor, Christine Lagarde, will take over at the European Central Bank. That’s scary for them because she’s just going to keep the firehose flowing, so to speak.
This is just another example, demonstrating what I always say: the United States is the oasis around the world. What’s great about the U.S. stock market is that you can get some yield.
In fact…you can get MORE yield from S&P 500 companies these days than from a Treasury bond! And that brings me to how we can capitalize on this, as investors.
3 Steps You Should Take Right Now
Falling rates is very, very bullish for stocks. Especially the stocks that I’d classify as “Money Magnets.”
One of the best ways to protect yourself AND profit is surprisingly simple: Own the stocks that will see high demand on Wall Street.
And what’s needed on Wall Street now is stocks that offer both growth and income.
I go a step further. The only Money Magnets I want to own are the ones that have the best fundamentals.
So, if a stock gets top marks from both my Portfolio Grader and my Dividend Grader tool…then it’s a “must-have” for my Elite Dividend Payers Buy List.
I’ve got a free glimpse of this Growth Investor strategy for you now. Go here for more and to see all 3 steps you should take today.