3 Things To Know About Interest Rate Cut
The US Federal Reserve (the Fed) just cut the interest rate by 0.25% and the current interest rate is 2 – 2.25%. This is the first rate cut in 10 YEARS! The last time we had a rate cut was right after the Global Financial Crisis.
The market has been expecting this rate cut for some time so it is not a surprise. But there are 3 things you need to know about a rate cut as an investor.
1. Why Did They Cut Interest Rate?
Usually, the Fed cut interest rate when they want to boost the economy. Without going too deep, the lower the interest rate, the easier to borrow money hence it is better for business.
So why did they cut interest rate now? The market seems to be booming, at least the stock market.
But if you take a look at other economic indicators, the future doesn’t look too bright.
Singapore, China, US, and India are showing signs of slowing economy.
Real economic data like import and consumer numbers tend to precede any changes in the stock market. So while the stock market looks good, the real market is already weakening.
2. Why is this Important?
Historically, the interest rate cut has always been a lagging indicator of the economy. The Fed tends to only cut interest rate when the economy is already slowing down. And often, it is too late.
Looking at the last two recessions, a recession tends to occur even after a rate cut.
This is important because I believe this rate cut could signal a possible recession in the coming months. However, if you go back further in history, the correlation is not so obvious. In any case, I rather be cautious.
3. What to Do Now?
As an investor, I generally don’t time the market, but it is pretty clear that the market level is high now. This also means the chances of future profit is lower if I invest at this level.
However, the market can go higher before coming down, so I am still invested but less so. Currently, I am roughly 60% invested. This means I still have 40% cash available to invest should the crisis happen!
In some ways, I am hoping for the crisis to happen sooner rather than later because it is during crisis when real money is made in investing.
If you want to understand more, we also discussed how Interest rate yield can be an indicator to predict crisis previously.
