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|---|---|---|
 Donald Trump | ||
Pennsylvania |  Joe Biden |
Rate cut could skew investing path toward stocks, gold
— -- If your dog could talk and you asked him if he'd like a treat, his response would probably be something like this: "Yes! Whoopee! You betcha! Woot! Woot! Woot! Pleasepleaseplease."
If Wall Street could talk and you asked if it wanted the Federal Reserve to cut interest rates, its answer would be similar — and only slightly more shameless. Wall Street loves rate cuts even more than dogs love cupcakes.
Current Wall Street consensus says that the Fed's Open Market Committee will cut its key overnight federal funds rate by a quarter of a percentage point, to 5%, at its Sept. 18 meeting. (The consensus is less firm, however, on whether rate cuts will be good for the economy in the long term.)
If the Fed does embark on a round of rate cuts, you might consider increasing your stock holdings, particularly in sectors that respond well when the economy booms, such as financial services and technology. And because rate cuts might also have unfortunate side effects on inflation and the U.S. dollar, you might consider investing in foreign stocks and gold, too.
Wall Street's lust for a rate cut stems mainly from the credit crunch. When lenders are reluctant to lend, interest rates rise, shaky borrowers default and the economy slows. Today's credit crunch results from the collapse of subprime mortgage lending. Subprime mortgages are home loans made to borrowers with shaky credit ratings. As those borrowers have started to default, lenders have become less willing to lend, thereby driving up short-term interest rates.
A credit crunch wreaks havoc on stocks, a fact long known to short sellers, who bet on falling stock prices. Back in the 19th century, very wealthy speculators would yank money from their bank accounts, making less money available for lending, driving up short-term interest rates and causing stocks to fall. Three robber barons — Daniel Drew, Jim Fisk and Jay Gould — made a fortune in 1868, and nearly collapsed the financial system, by doing just that. Ah, the good old days.
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