Do Rate Cuts Spell Doom For Markets? | ETF Trends

With the FOMC meeting just this week, investors and economists alike were restlessly awaiting the announcement by the Fed, hoping that rates would be cut. Markets have been moving higher since June, when Federal Reserve Chairman Powell signaled the Fed would come to the market’s aid if necessary. Normally however, when the Fed starts loosening policy, it does so due to clear-cut signs of impending economic weakness.

“When the Fed is cutting rates, and when it starts to cut rates, that’s generally a bad sign for the market. So again, we talked about the last time they started cutting, September ’07. The market fell like 50% from there. In the prior recession in 2001, when they started cutting, it fell another 40%. And the other time when it ‘did work’, that was when the market had already started to fall, when the growth was already much worse, and it was kind of too late from that perspective,” said Dan Suzuki, on CNBC. Suzuki is a Richard Bernstein Advisors portfolio strategist.

Many investors would likely agree that the conditions at present are nothing close to those of 2007. Yet the Fed is still anticipated to signal that it will start cutting rates, possibly as soon as July. The futures market is currently pricing in up to three quarter-point reductions before the end of the year.

“I think the markets are giving the Fed too much credit in their ability to offset the weakness that you’re seeing. So even things are as bad as the market thinks it is, to the point that we need that Fed cut, I don’t think the Fed has the ability with a couple of you know 25 basis point cuts to really reverse that situation without the benefit of fiscal stimulus as well,” Suzuki added.

Looking for an escape from the global uncertainty and tumultuous ride that investors have been enduring, markets are counting on the Fed not merely to ease but to do so hawkishly during a period when the unemployment rate is at a 50-year low, GDP is growing well north of 2% and the stock market is around record highs. The danger however, is that slashing rates is therefore likely to pacify investors but provide the Fed with insufficient space to adjust to uncertainties during a more serious downturn.

Watch the full CNBC segment featuring Dan Suzuki:

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