On July 31st, Expect the Federal Reserve to Cut Interest Rates
On July 31st, the Federal Reserve (Fed) is expected to announce a wind down and reversal of the tightening cycle which took place over the last five years. For those that remember, the quantitative easing program, which was considered one of the most aggressive monetary stimulus initiatives in US history, ended in October 2014.
Various Fed governors have expressed the need for lower interest rates over the near term for two reasons. First, inflation has consistently undershot the Fed’s inflation target of 2%. A 2% inflation rate is considered the “Goldilocks” rate for inflation, as it is high enough to encourage production of goods, yet low enough to not eat away at the purchasing power of consumers. The second expressed reason for lower rates is to help offset any economic sluggishness caused by recent disappointing economic growth statistics from trade partners, shrinking business confidence, and a slowing housing market.
Cutting Early Is Better Than Late
Even with the expressed concerns from the Fed, our opinion is that the US economy is strong. Real GDP growth is expected to be above 3% for the first year since 2005, the labor market is robust, and the manufacturing industry is improving, albeit slower than last year. Our research indicates that the Fed is attempting to cut rates in advance of any major economic deterioration versus waiting until the economy has significantly weakened. Historically, this type of policy has kept the most severe recessions at bay. See below for a history of the timing of past cutting cycles and how it affected industrial production and the economy.