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Will a Fed Rate Cut Today Trigger a Stock Market Rally?


Jul. 31 2019, Published 7:31 a.m. ET

Is the long wait over? The market and investors have been holding their breath for a Fed rate cut this year. Stock markets have surged on optimism about an interest rate cut this year. Today, the Federal Reserve at its FOMC meeting will announce its decision about an interest rate cut at 2 PM EST. Despite strength in the US economy this year and with good job numbers, hopes of a rate cut has been driving the stock market. The Fed is widely expected to cut interest rates by 25 basis points.

The market seems to have put too much faith in the Federal Reserve’s decision about a rate cut. The earnings season is already driving the stock market. However, all eyes are on today’s decision, which could trigger a stock market rally. Or could the market take a hit if a rate cut doesn’t happen?

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Is the long wait finally over for a fed rate cut?

The Federal Reserve has kept the benchmark interest rates zero for a long time. In December 2015, it made its first rate hike, and since then there have been numerous rate hikes. The Fed’s new chair, Jerome Powell, also continued with rate hikes last year. The Fed has not cut interest rates since 2008. So will it go ahead with its decision this time or will it surprise the markets again?

President Trump’s pressure on the Fed

President Trump lashed out at the Fed yet again and has been pressuring the Fed to cut rates. On Monday, he tweeted that the Fed has made all the wrong moves and that a small rate cut is not enough. A FOXBusiness article mentioned that President Trump told reporters outside of the White House on Tuesday, “I would like to see a large cut, and I would like to see immediately the quantitative tightening stop.”

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Is a fed rate cut really needed?

We have previously discussed that things are not that bad in the US economy. The strong jobs report in June indicated a strong economy reducing the odds of a rate cut. US GDP data released on July 26 also showed that the US economy had expanded 2.1% in the second quarter. Other central banks globally are also reducing interest rates, which also put pressure on the Fed to make a decision soon. But many participants question if a Fed rate cut is really needed.

Expectations of a Fed rate cut have benefited many stocks this month

Various sectors and stocks have benefitted from the optimism around a rate cut this month. As of July 30, Tesla (TSLA) has risen 15.5% in July. General Motors (GM) has surged 2.4% in July. Tech stocks Advanced Micro Devices (AMD), Microsoft (MSFT), Micron Technology (MU), and Intel (INTC) are up 11.5%, 4.7%, 22.9%, and 8.1% in July, respectively.

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Consumer confidence data released yesterday

Consumer spending only rose by 0.3% in June. However, consumer confidence data for July rose to its highest level this year. CNBC reported that The Conference Board, a business research group, said on Tuesday that the confidence index rose to 135.7 in July from 124.3 in June. How this could affect the Fed’s decision today is something to watch out for.

The rate cut could also influence the dollar’s performance too. A stronger dollar could impact global growth. The dollar index as tracked by the Invesco DB US Dollar Bullish (UUP) has gained 4.4% YTD.

Market performance

The SPDR Dow Jones Industrial Average ETF (DIA) closed 0.08% lower yesterday and has returned 16.6% year-to-date. The Invesco QQQ Trust (QQQ) tracks the NASDAQ Composite Index and has gained 20.5%. The ETF closed with a loss of 0.43% on Tuesday. The SPDR S&P 500 ETF (SPY) closed with a loss of 0.24% on Tuesday. SPY has returned 20.6%.

What’s happening this week?

The earnings season is also driving the stock market performance right now. Apple (AAPL) released its better-than-expected third-quarter earnings yesterday. Both revenue and earnings surpassed analyst estimates. However, iPhone sales were down for the quarter. The stock was down 0.4% yesterday. Samsung also released its second-quarter earnings yesterday. General Motors (GM) is set to release its earnings tomorrow. The stock was down 0.61% yesterday after it announced a production halt in one of its oldest plants.

Stock market and risk go hand-in-hand so we certainly can expect some uncertainties to drive the Fed’s decision today. Check back with us to know more about how the stock market reacts to the Fed’s long-awaited decision today.


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