Risk of Market Disappointment Over the Outlook for Fed Rate Cuts

Why should the Fed cut its key rates when the US economy is doing well? This question is of concern to the markets. The Fed can justify a 0.25 point cut in rates, but it could dampen expectations for the future.

The market’s attention will be mainly focused on the meeting of the US Central Bank on Tuesday and Wednesday, the latter preparing, according to the markets, to cut interest rates for the first time in eleven years. Fed Chairman Jerome Powell will give a press conference on Wednesday following a two-day meeting of the Monetary Committee (FOMC).

Investors are very cautious because more and more of them are wondering why the Fed should lower its key rates when the economy is doing well. At 2.1% year-on-year, the expansion of the US Gross Domestic Product (GDP) from April to June far exceeded analysts’ average expectations of 1.8%.

A priori the US economy is doing very well, but given the low level of inflation and the deterioration in global growth, the Fed could act as a preventive measure. Indeed, while domestic demand is doing well in the United States, foreign demand remains weak.