COTW: An Unprecedented Rate Cut

July 30, 2019

If the U.S. Federal Open Market Committee (FOMC) cuts its key policy rate on July 31, 2019, as is widely expected by market participants, it could mark the start of an unusual rate cutting cycle. In at least the last four decades, the Fed has never started a rate cutting cycle with market and economic conditions — as proxied by the U.S. unemployment rate, stock prices, high yield bond spreads, Treasury yields and the real Fed Funds Rate — as easy and accommodative as they are today.

 

While the knee-jerk reaction of capital markets to rate cuts is typically positive, the persistently low level of interest rates around the world for most of the last decade is starting to create major imbalances. As Morgan Stanley strategist Ruchir Sharma writes in an op-ed in today's New York Times, "by further lifting stock and bond prices and encouraging people to take on more debt, lowering rates could set the stage for the kind of debt-fueled market collapse that has preceded the economic downturns of recent decade. Our economy is hooked on easy money — and it is a dangerous addiction."  We agree.

 

The chart below can be downloaded here

 

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SpringTide Partners, LLC is a Registered Investment Advisor with the state of Illinois and other states jurisdictions where required. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. All investing carries risk including risk of principal loss. All statements made on this website are opinions of SpringTide Partners, LLC and are subject to change. SpringTide Partners, LLC assumes no responsibility for the accuracy of the data included. Statements made on website shall not constitute investment advice.

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