Why The Fed’s Rate Cut Should Not Matter to Investors

A quarter-cut rate cut is already baked into current stock prices.

As expected, the Federal Reserve announced a quarter-point rate cut on October 30. This moved the benchmark interest rate down to a level between 1.50% and 1.75%. It was the third time the Fed has cut the interest rate in 2019. 

In remarks following the announcement, Fed Chairman Jerome Powell said he felt the Fed’s monetary policy was “in a good place”. Powell acknowledged that sluggish global growth and trade concerns have been a drag on the U.S. economy. At the same time, he stressed that the consumer has been driving this economy. And to that end, consumer spending remains strong. 

Much ado about nothing

Unlike the last two rate cuts that saw significant initial swings in the market; this most recent cut was met with a largely ho-hum approach. The markets were essentially flat on the news. This is because the market had largely expected the Fed’s decision. 

The reality is, ever since July, the market has gotten the accommodative monetary policy it has desired. To that end, the market has become much more adept at pricing in these rate cuts. Therefore, prices don’t move much on the news. 

The reality of this interest rate cut will not be significant for the consumer. After going down after the initial rate cut in July, mortgage rates have recently started to tick back up. In general, the U.S. economy remains very strong when compared with the global economy. The same factors that prompted the Fed to lower interest rates in July still exist today (China is at a 30-year slowdown, Europe is in recession. The U.S.-China trade war is still ongoing). 

And although business investment posted a lower number for the second straight quarter, Powell noted that the Fed does not foresee rising jobless claims. In fact, job creation has remained solid. Investors will get more guidance on that front on November 1 when the October jobs report is released. 

The big question on investors’ minds is what to do now? 

As part of their Third-Quarter Economic Indicator Survey, Bankrate reported that economists believe there is a 41% chance of a recession before the 2020 elections. Furthermore, in a related poll, Bankrate cites that 40% of Americans are not ready for a recession. 

So what’s an investor to do? 

If you’re a growth investor, just keep doing what you’re doing. It may sound simplistic, but really you can’t fight the trend. The market has been remarkably resilient despite the headwinds that are still present. Timing the market is usually a fool’s errand and that would certainly be the case here. With corporate earnings still being largely positive, there’s no reason to believe that stocks will be facing a significant decline in the fourth quarter. 

However, lower interest rates are hardest on income-oriented investors. These investors typically have a lower risk tolerance either by choice or by circumstance. For these investors, a declining interest rate environment may mean that they have to, at the very least, maintain their current exposure to stocks. In some cases, they may need to increase that exposure. 

However, in the current market, there are opportunities for risk-averse investors that still allow them to choose very financially stable stocks. There are several blue-chip stocks that are outperforming the S&P 500. This includes stocks like Apple NASDAQ: AAPL and Home Depot NYSE: HD. Many of these stocks also pay dividends, which can help income investors benefit from both regular dividend income while providing some opportunity for capital growth.

Are future rate cuts likely?

The stock market is currently pricing in two additional rate cuts in 2020. But will they happen?

The decision to cut rates was not unanimous. The President of the St. Louis Fed, James Bullard, voted for a larger cut. And two other chairs, Kansas City President, Esther George, and Boston Fed President, Eric Rosengren, voted to keep the interest rate unchanged. 

The only question going forward is whether or not the Fed would signal that further rate cuts were in the offing. On that front, the Fed changed their language from saying they will “act as appropriate” going further to they will “assess” conditions going forward. 

According to Chairman Powell, the overall (U.S.) economy is growing at a moderate rate. This was supported by the announcement on October 25 that the U.S. economy expanded at a rate of 1.9% in the third quarter. Although the number came in higher than expected, it was still the second slowest pace of the Trump administration.