Fed needs to cut rates now as $6.4 trillion wiped off markets
The Federal Reserve needs to act and slash rates now, and again in September and November, after global stocks have lost a staggering $6.4 trillion in just three weeks.
Monday’s global sell-off has sparked investor fears of a looming recession in the US. The Federal Reserve is lagging on rate cuts, and a rising Yen exacerbates economic turbulence in Japan.
Indeed, over the past few weeks, the Japanese Yen has soared by around 8% against the greenback. This reversed last month’s decline, when it fell to a low not seen since December 1986.
This latest increase in the Yen poses a challenge to the widely used ‘carry trade’ strategy, where investors generally borrow in a low-interest currency like the Yen to invest in higher-yielding currencies, such as the US dollar.
However, with the yen strengthening, the cost of maintaining these trades has surged, causing a swift sell-off in US equities as investors rush to repay yen-denominated debts.
This shift underscores the vulnerability of US markets to changes in global financial dynamics. The decline in US stock prices as the Yen strengthens clearly illustrates the deep interconnectedness of global economies.
The Current Situation
As such, despite a rebound on Tuesday, market confidence has taken a major hit, and markets will remain in panic mode until they see signs the US central bank is taking action.
As I was quoted by CBS News, Daily Express, Nasdaq, Gulf News, Khaleej Times, News Ghana, The Herald Sun, Money.com, Bitcoin Insider, and Foreign Affairs, among other media, we need to see a decisive response from the Fed to avoid more instability.
An emergency rate cut before the September meeting would strongly indicate that the Fed is ready to restore confidence and counter destabilising forces.
Indeed, the partial recovery in stock markets should not make the Fed feel complacent. Instead, it should see it as a temporary reprieve.
The Market Insight
To my mind, by reducing rates by 50 basis points in both September and November, following an emergency cut in August, the Fed can deliver the essential signal of support.
The market insight itself is one of the strongest arguments for immediate Fed action.
Financial markets serve as a valuable gauge of economic sentiment, despite being frequently criticised for their volatility and unpredictability.
The markets have more insight than the Fed. The global downturn clearly indicates that investors are preparing for rough times. By ignoring these signals, the Fed risks worsening the instability it aims to avoid.
The Consequences of Action
Consequently, if the Fed shifts its stance and implements the necessary rate cuts, investors must adjust their strategies accordingly.
A rate cut could revive market enthusiasm, prompting capital flow shifts and risk assessment changes across different asset classes. Investors should reassess their portfolios in anticipation of these potential changes.
In a low-interest rate environment, sectors sensitive to growth, such as technology and consumer goods, are likely to gain. Companies can more freely invest in innovation and expansion when borrowing costs are reduced, allowing these sectors to thrive.
As a result, investors may consider boosting their investments in these sectors to benefit from such gains.
In addition, lower borrowing costs make leveraged investments more attractive. However, investors should approach these opportunities with caution.
Yet the increased potential for returns brings heightened risk. Therefore, maintaining a diversified portfolio is crucial to managing potential downsides effectively.
So, as Fed policymakers deliberate, they must heed the signals from the markets. Ignoring these indicators could be risky. The Fed needs to not only listen to the markets but also act with the urgency the situation requires.
The time for action is now.
To view my previous blog post, click here.