Interest rates will not be cut in the USA for the time being. At its meeting on June 19, the Federal Reserve (Fed) left the level between 2.25 percent and 2.5 percent. However, the US central bank is forecasting interest rate cuts in the coming months if the economy deteriorates. The same applies to the European Central Bank.
What Happens When the Fed Lowers Interest Rates
Investors have already priced further expansionary measures by central banks into stock prices. Finally, central banks in India, Malaysia, the Philippines, and Russia have already cut interest rates in response to the slowdown in the economy.
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Trade conflict comes to a head
All in all, the economy in the US is stable, but manufacturing is losing momentum. The manufacturing industry is under pressure due to increased tariffs. New taxes are constantly being introduced worldwide. India recently announced plans to impose tariffs on 28 imported products from the United States. In doing so, the country has responded to the US decision to withdraw India’s preferred trading partner status.
Over the past few weeks, investors have kept asking me what happens if the Fed doesn’t cut rates this year. The stock exchanges are certainly sensitive to missing signals from the central bank. I expect stocks to sell out. In general, the Fed’s communication is crucial for investors. At best, the Fed will explain itself again in the coming months to lower interest rates in the event of an economic downturn. At the same time, the central bank should remain flexible in monetary policy. Too determined a tendency to cut interest rates can also scare investors away.
Stocks, bonds, dollars, gold – what investors can expect now
The spread of the corona virus has startled investors and led to sharp cuts on the stock markets. This could lead to a self-reinforcing wave – and trigger turbulence in all asset classes.
The number of infections with the novel Covid 19 virus is increasing rapidly in a large number of countries. Any hope that the virus can still be contained should have been shattered. In any case, the actual number of sufferers is not known, and the official information strongly depends on how and where testing takes place. With the expansion of test activities, the number of cases in other European countries, but also in the USA, will soon increase significantly. The stock markets plunged worldwide this week, and Dax and Dow accelerated their slump.
As a result, an increase in restrictions in public life can be expected. This should also reinforce expectations about an increasing loss of demand on the one hand and impairments in the global supply chains and thus increasing production restrictions outside of China on the other.
Shock in demand and supply at the same time
From an economic perspective, the epidemic means both a negative demand shock (because people always leave their homes and therefore consume less), as well as a negative supply shock (for example, because companies have to close their factories if suppliers can no longer provide important preliminary products or the employees no longer come to their jobs). The downward pressure on economic activity increases accordingly.
The outlook for inflation, on the other hand, cannot be predicted clearly, since a declining demand generally counteracts the devaluation of money, whereas a decreasing supply tends to accelerate it.
How strong the negative effects on the economy will be cannot currently be reliably assessed. Because it is not yet clear whether and if so to what extent companies will be affected by factory closures and how long the disruption in demand, supply chains and thus production will continue.