Speculations of Fed Rate Cuts Rises Amidst Falling Stocks & the Trade War

  • Traders betting on interest rate cuts as early as next month
  • James Bullard, head of St Louis Fed said interest rate might be “inappropriately high” and lower interest rates might be “warranted soon”
  • Stock markets now resigned to the FED cutting rates

Since April, stocks are down 7 percent following the failure of trade talks between the US and China and the addition of Mexico, and India that could even further extend to Australia. The intensifying trade war led S&P 500 to drop to 2,750 level from 2,960 in late April. Other stocks are also sharing the same story.

Yields have fallen too with reportedly people willing to pay the German government to lend them money. As a result, gold has been in a bull run since August last year. Though not much, for gold these have been some of the best months since 2012.

All of this has prompted predictions for Fed interest rates cuts. Traders are betting on July interest rate cuts after a top official at the central bank admitted that market signals indicated that interest rate might be “inappropriately high.”

The Fed has planned to hold its current interest rates steady at 1.25% to 2.5% through 2019 but amidst slower economic growth, investors are increasingly speculating that it could force the Fed to cut rates before the year ends.

James Bullard, head of St Louis Fed said on Monday that lower interest rates might be “warranted soon” citing slowing global growth, trade war risks, and lack of inflation pressure in the US.

“A downward policy rate adjustment may be warranted soon to help re-centre inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” Bullard said.

The Federal Reserve is actually likely to cut interest rates twice this year, according to JP Morgan strategists with Barclays following by calling out cuts as well.

“If the Administration follows through on the proposed actions, we believe the adverse growth implications would prompt Fed easing,” said Michael Feroli, chief U.S. economist at J.P. Morgan.

The federal fund rate is a monetary policy tool that is used to achieve the Fed’s goal of price stability with low inflation and sustainable economic growth. By changing the rates, Fed influence the money supply, that begins with banks and then eventually goes down to consumers.

Lowering the rates is to stimulate economic growth as low financing costs encourage borrowing and investing. However, when rates are too low, it can spur excessive growth and even inflation. And inflation eats away the purchasing power further undermining the sustainability of desired economic growth.

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