"The Fed Cut Brings No Clarity, Just Uncertainty"

At the beginning of last week, as the Federal Open Market Committee’s meeting approached and a rate cut appeared likely, we began thinking about the implications of a rate cut for the business community in general and our clients in particular.

For example, at a time when the fundamental economics for real estate ownership are strong, a rate reduction could provide a unique opportunity for owners to refinance loans that are either nearing maturity or may have higher rates. For anyone who had been on the fence, the rate reduction could provide the impetus to refinance or could encourage would-be buyers to complete potential acquisitions or development opportunities that were marginal or even infeasible at current market rates.

Similarly, in a period of low unemployment and growing consumer spending, the American economy does not seem to need a boost. Yet, with a cut, businesses contemplating expansion would find their borrowing costs reduced. To the extent they take advantage of the reduced cost of capital, and make further investments or expand, the Fed will have accomplished its goal.
Then Wednesday arrived with the Fed’s announcement of a 0.25% rate cut. The markets seemed to be disappointed by the meagerness of the cut. Moreover, when Federal Reserve Chairman Jerome Powell addressed what the Fed’s next step would be, he cautioned about assuming more cuts were coming, further confusing the markets. We are left, therefore, wondering whether further rate cuts are on the horizon or whether now is the time to act before rates start increasing.

The Fed’s mixed message—a cut to address concerns about the economy, but a warning that the cut should not be interpreted as a change in direction on rates—may reflect the Fed’s uncertainty about what it needs to do and what it can do. Historically low unemployment in the United States should be driving up inflation and signaling a need for interest-rate increases to cool off the economy. Yet, inflation remains at or below the Fed’s target. Consumer confidence remains high, although consumer debt has reached record levels. And, in contrast with the U.S. economy, which is in its 123rd month of expansion, the European, Japanese and Chinese economies are slowing. Recent cuts in interest rates by the European Central Bank and the Bank of Japan—coupled with clear messages from both that rates could be cut further—puts upward pressure on the U.S. dollar absent corresponding rate cuts by the Fed. Finally, the trade war with China looms large. It is clearly impacting both the U.S. and Chinese economies, albeit unevenly even within each economy.

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