So much for the 2% inflation “target.” So much for watching jobs numbers, or manufacturing numbers, or anything else. The Fed cut interest rates by a quarter point today because Wall Street wanted them to cut interest rates by a quarter point, and for no other real reason.
The Federal Reserve’s Open Market Committee’s own statement sounds like an endorsement of an economy that’s doing pretty well, and doesn’t need any real help in the form of an interest rate cut.
Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.https://www.marketwatch.com/story/fomc-statement-after-september-rate-cut-2019-09-18?mod=mw_theo_homepage
It also notes that household spending has been strong, inflation has been calm, and frankly, everything is fine, with the possible exception of business spending, which drives the economy far less than everything else it just mentioned.
In other words, no rate cut was needed, at least not today, but investors got one anyway because of customer sentiment, a lingering trade war, and a market that’s already overvalued being nervous to go much higher. Despite what Wall Street cheerleaders hope, a rate cut isn’t going to help much.
Since U.S. businesses have basically forgotten how to invest in themselves and their own futures, all they can do is ride the market cycles. Everyone knows this market cycle is getting old, even if it isn’t really to roll over, so they do the only thing they know how. They stop hiring, refuse to raise wages, and give all the profit they make back to shareholders.
Check out my Acorns review.
Of course, the “return to shareholders” cannot be done via dividends, lest they be held accountable for continuing to make and grow said dividend payments, so we’ll see more worthless share buybacks that do nothing to grow the corporation, nothing to improve the company position relative to competitors, or to insulate it from the coming recession, no matter how long that takes.
Instead, they’ll pat themselves on the back for a job well done, and slightly higher earnings per share driven not by growing earnings, but by lower number of shares, and wait for the next rate cut. Until then, it’s time to hoard cash despite the fact that is is earning practically nothing (and will earn less after this rate cut.)
Now would be the time for a visionary CEO to strike out and build, build, build, but visionary CEOs have been relegated to the dustbin of history, replaced by CEOs, who think looking past the next quarterly report counts as long-term thinking.
All in all, there’s no need to worry. Rates were low, they are low now, and this rate cut is nothing but a wasted, hollow, gesture that will move neither long, nor short-term interest rates by a noticeable amount.
The Fed has one last rate cut in its arsenal that is can realistically use, and it’s currently telling investors it will waste that shot later this year, probably as we head into the holiday season.
Enjoy your big news, is no news day, and look for absolutely no effect from this rate cut in coming months.