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3 Reasons Fed’s Right Move Boosts Profit Potential

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Why a 0.5% Rate Cut Was the Right Move by the Federal Reserve

Introduction

Many have compared the Federal Reserve’s task of achieving a "soft landing" to the difficult task of landing an F-18 Hornet on an aircraft carrier. Just like the pilot relies on tools and instinct for a successful landing, the Fed must make critical decisions to slow down economic growth without causing a recession.

Three Reasons for the 0.5% Rate Cut

Reason 1: Signs of Economic Weakness

  • Recent reports show stress in the American consumer, with record credit card balances and delinquent loan balances.
  • The Beige Book survey revealed declining economic activity in most Fed districts, with manufacturing job losses and softer home prices.
  • The evidence supports the need for a 0.5% rate cut to boost economic activity.

    Reason 2: Inflation Moderates, Unemployment Rises

  • Inflation is cooling, as shown by recent reports, with the core PCE index nearing the Fed’s 2% target.
  • Unemployment has increased significantly, with job creation numbers revised downward.
  • The Fed’s focus on unemployment is crucial to maintaining price stability without causing a rise in unemployment.

    Reason 3: Aligning with Market Rates

  • Misalignment between the Fed and Treasury market can lead to higher borrowing costs for consumers and businesses.
  • Treasury yields have fallen, prompting the Fed’s rate cut to realign with market rates.
  • Further rate cuts may be necessary to ensure market stability and economic growth.

    Who Benefits from Falling Interest Rates?

  • Smaller-cap stocks benefit from falling interest rates due to reduced borrowing costs.
  • These companies, valued between $300 million to $2 billion, can allocate more capital to operations.
  • Small-cap stocks have the potential for significant gains, especially with rate cuts stimulating growth.

    Conclusion

    The Federal Reserve’s decision to cut rates by 0.5% was a strategic move based on economic indicators. By addressing signs of weakness, moderating inflation, and aligning with market rates, the Fed aims to stimulate economic growth. Investors can explore opportunities in small-cap stocks to capitalize on the current market conditions.

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