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Investors: Don't Expect a Rate Cut for the Holidays

Credit: The Street
Published on November 13, 2019 - Duration: 01:50s

Investors: Don't Expect a Rate Cut for the Holidays

The Federal Reserve clearly is hesitating to cut rates, at least in the near term.

Since the beginning of the Great Recession sparked by the 2008 financial crisis, growth in the economy and stock prices has been aided by low interest rates.

Now, the economy is in a late-cycle stage, with the expansion in its 11th year.

GDP growth is decelerating and a seemingly broken Phillips Curve (more employment equals higher inflation) has inflation growing at under 2% of late.

The Fed has cut rates three times in 2019, helping support the economy and the S&P 500's 22% year-to-date gain.

But now there are several forces that make it hard for the central bank to continue pumping liquidity into the economy.

For the moment, Fed Chairman Jerome Powell told Congress Wednesday that he sees the current expansion continuing and that rate cuts will be necessary only if the economic significantly disappoints.

But the U.S.-China trade war looks to be headed in the wrong direction after several weeks of optimism.

This pushed down all three major U.S. stock indexes Wednesday.

And some investors are still looking for more rate cuts.

"If the data turns south, the Fed will be there to add more stimulus," Tony Bedikian, head of global markets at Citizens Bank, told TheStreet.

But Powell mentioned several factors that weigh on the Fed's ability to cut rates.

First, the federal budget deficit leaves the government in need of cash, which means that in the event of a recession, it can't cut taxes very much to stimulate growth.

That means the Fed would need to step in and lower interest rates.

But the Fed has only nine rate cuts at its disposal and it has used three.

Some have said the Fed may have to keep its powder dry given the prospect that a recession might hit.

In addition, Powell said, currently low rates are limiting the Fed's ability to stimulate economic growth.

Rates in the U.S. have recently ticked higher, but the 10-year treasury still sits just above 1.9%, with the federal funds rate between 1.5% and 1.75%.

That's a view held by many investors, but the Fed's confirmation solidifies it.

What stock investors must hang their hats on now: resolution of the trade war, which remains one of the largest economic X factors at present.

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