Heresy Financial: Why Fed Rate Cuts Will Trigger a Recession
Interest rates are set to decline coming in mid-September. This comes more than a year after the Federal Reserve last raised interest rates, and four years after the central bank last cut.
Typically, the Federal Reserve raises interest rates to slow the economy. Doing so curbs inflation, such as the high inflation experienced after the pandemic. Lowering rates is designed to spur economic growth. It can also be seen as a sign of a slowing economy.
Many times, the economy is already weakening quickly by the time the Fed starts to cut rates. That’s why many see the potential for a recession.
Typically, if the Fed starts with a quarter-point rate cut, markets can continue higher, and the economy may continue to grow. If the Fed starts cutting rates with a half-point cut, it could signal that economic danger is already here.
As with anything else, the economic data will take months to indicate how the economy will fare. Until then, the market trend is higher, although seasonal factors may weigh on stocks over the next two months.
The upcoming election will also create some market uncertainty going into November. After the election, markets will likely be clear to end the year on a strong note. And if the Fed cuts by just a quarter point, stocks will likely close the year at or near new all-time highs.