Broader economic data has confirmed cooling inflation, and now markets expect a September interest rate cut. The question for investors is — how much of a cut will the Federal Reserve announce? On this IBD Explains, IBD News Editor Ed Carson and Meredith Heyman recently discussed what investors need to know about interest rate decisions' market implications and to respond to market volatility.
This interview has been edited for clarity and brevity.
Rate-Cut Implications For Investors
IBD: What's the rate-cut outlook for the September Fed meeting?
Carson: The markets are expecting a rate cut. Right now, the markets are leaning toward a quarter-point cut at this meeting. There's a chance of a 50 basis point cut. It's sort of wavering back and forth. (There are) still some economic reports between now and the meeting. I think the markets want a little bit more, but they'll take what they can get.
IBD: What Are Interest Rate Cut Implications For Investors?
Carson: Look, cheaper money is always a positive thing for the economy. It's also discounting. Typically people will discount future growth or… future earnings by the discount rate. And if rates are lower ... future earnings look better today. So those high-growth stocks will often get a boost from lower interest rates.
IBD: How will this interest rate decision impact industry groups and sectors, from homebuilders to technology stocks?
Carson: Homebuilders definitely… should get a boost from this — a lot of cyclical names that are very tied to the growth of the economy. Again, the high-beta names — it may not help the growth companies as much, but it may help those growth stocks that have those higher multiples. And people are expecting strong growth down the road… This is all things being equal. These rate cuts are coming in part, not just because inflation is cooling, but because the economy's slowing. So that's one reason why the Fed is doing it. So this may help, but it's also as other things are sort of weighing on some of these sectors as well. So it's not necessarily that you're going to see a positive reaction. It just may minimize the negative trends.
September Fed Meeting Interest Rate-Cut Outlook
IBD: How did the latest broader economic data affect this decision?
Carson: Well, inflation sort of set the stage. Inflation has cooled off a fair amount over the last few months. So that made the Fed willing to (cut). And now in the last few weeks, we're seeing economic data look weak. ... (It's) gone from is inflation too hot to is growth too cool? A lot of indicators have fallen to multiyear lows on job growth. So now they're worried… It's a different dynamic that's been going on.
IBD: How much is the central bank expected to cut interest rates? A 50-point cut would be more aggressive than a 25-point cut. Is it better for the market and the economy to get a bigger cut, or does it signal the Fed is behind the curve with taking action to avoid a recession?
Carson: Sometimes (it's better to) be more gradual, making sure you don't swing back and forth. … The Fed likes to be consistent… This is what's going to happen. That in itself is nice if you can reduce that uncertainty. The half-point move would raise the concern the Fed had been behind the curve. But some might argue if the Fed doesn't cut by 50 basis points, they'll be behind the curve. So the Fed sort of has to hopefully do what it thinks it needs to do for the economy, (that's) not always for what's going to be for the momentary psychological needs of investors.
Central Bank Expectations For Interest Rate Cuts
IBD: What's the expectation of further rate cuts this year?
Carson: The markets are expecting quite a bit of cuts. So even though they're only pricing in a quarter-point cut for September, they're expecting 100 basis points or 125 basis points this year. There are only three meetings (before the end of the year) including September. So there's probably an expectation they'll be at least a 50 basis point cut somewhere along the way. That doesn't mean it's going to happen. The market at the end of last year was expecting six rate cuts, and then earlier this year they were expecting no rate cuts. So it can swing back and forth. But right now there is an expectation of quite a bit of easing before the end of the year.
IBD: How did this Spring and Summer without rate cuts affect the market and broader economy?
Carson: That had an impact, and it was one reason why we had a spring correction. Inflation came in sticky and was not coming down. And so the rate cuts started getting priced out. And it shifted mindsets because markets were rallying to start the year thinking, OK, we're going to get lots of rate cuts. And then… maybe not… As the summer came in, inflation started to cool. the market has priced that in, and that's part of the issue. When the Fed cuts rates, the market knows that a rate cut is coming. So unless they're surprised with the size of it, that may not move markets that much that day. A lot of the market move in the summer was on inflation's cooling. We're going to get rate cuts. And so that has been a major driver of the markets this year.
Responding To Market Volatility
IBD: How should investors react to the market volatility that may come with the rate-cut announcement?
Carson: It's a little bit like an earnings report for the market. And so sometimes you just have to sit back just a little bit, not immediately move on it… because there can be some whipsaw action. There'll be the Fed rate move. And then Fed Chief Powell will speak a little later. And so there can be some big moves back and forth and sometimes the next day… Try not to immediately react to it so much. You can take some action if buying or selling seems appropriate. But just do it sort of very gradually because those things can move around.
