Dow Gets Rate Cut Indigestion After Fed Delivers 25-Basis Point Cut

The capital markets got what they were hoping for on Wednesday after the Federal Reserve delivered a rate cut of 25 basis points. However, the rate cut indigestion by the major indexes may have showed that the markets were hoping for a larger cut. 

“There’s a range of things that they’re looking at. Really, the low inflation allows the Fed some latitude to take preemptive steps and hopefully avoid moving in the future to something like negative rates,” said Mark Haefele, global chief investment officer at UBS Wealth Management. “Because they did only 25 basis points, they avoided doing what some would have felt was more shock and awe with 50 basis points. So they can move towards language like ‘data dependent’ now that they’ve shown they are prepared to be flexible.”  

The central bank cited “implications of global developments for the economic outlook as well as muted inflation pressures.” The Fed also said it would “act as appropriate to sustain the expansion,” which meant that future rate cuts could take place. 

The cut in rates come just after the U.S. economy added 170,000 nonfarm payrolls and the unemployment rate currently stands at a low 3.7 percent, but capital markets were expecting the U.S. Federal Reserve to cut interest rates this week. Will a 1/4-point cut continue to provide strength for U.S. equities?

The Commerce Department recently reported that Gross domestic product (GDP) fell during the second quarter to 2.1 percent, but still bested Wall Street analysts who were expecting a larger decline. GDP fell from 3.1 percent in the first quarter, which represents the weakest increase since the first quarter of 2017.

Initial forecasts were that that GDP would increase by 2 percent.

“This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain,” the FOMC’s post-meeting statement said. 

Investors looking to take advantage of further strength in U.S. equities if the domestic markets respond positively to future rate cuts can look the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

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