After a terrible jobs report, there is now a good chance the Federal Reserve will cut rates in the next few months. Last Friday’s market news went out with a bang, and not in a positive way. While the stock market was up 263 points for the day, the real story was the jobs report. The average individual may be confused as to why the stock market soared over 260 points on bad economic news. In May the US economy added 75,000 jobs well below market expectations of 180,000 jobs. According to the BLS (Bureau of Labor Statistics), the job details were not pleasant, as most of the jobs added were low paying jobs.
- Employment in professional and business services continued to trend up
over the month (+33,000).
- Employment in health care continued its upward trend in May (+16,000).
- Construction employment changed little in May (+4,000), following an
increase of 30,000 in April.
- Employment showed little change in May in other major industries, including mining, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government.
In today’s market, bad news is good news. Investors prefer unfavorable economic news because they know that if the economy continues to deteriorate, the federal reserve will have to reverse its monetary policy and begin cutting interest rates. After Friday’s job report, most market analysts believe there is a 37% chance the Fed will cut rates this month and a 95% chance of reducing rates in July.
Fed Cutting Rates
With a good chance of rate cuts coming in a few months, it’s no wonder the stock market soared on Friday. As I stated before, the economy loves cheap money because when rates are low, borrowing costs are low. Investors want low borrow costs as it allows them to fund development projects or even leverage their portfolios.
Additionally, low rates will also give easy access to credit for consumers. When interest rates are low, borrowing costs go up. Credit card debt continues to soar to all-time highs. Although the Fed has hiked rates several times in the past few years, interest rates are only at a paltry 2.25% – 2.50%.
If the markets want the Federal Reserve to cut rates, better yet if the Fed is unable to raise rates to at least 4%, this economy is far from being healthy. A strong economy would be able to withstand rates of 4-6% easily. But the fact that the job market is shrinking tells a story of a weak economy.
Moreover, this entire charade of the Fed, saving the economy from the great recession will be exposed. However, for now, the wealth transfer from the middle class to the rich will continue as the markets will likely rise in the short term. Even though, the real damage is going to occur in the dollar.
Furthermore, after the Fed decides to cut rates, Quantitative Easing (QE) will be just around the corner. The economy is too indebted that simply cutting rates to zero won’t stop the debt explosion. The Federal Reserve is going to have the relaunch QE, but only this time QE will cause the demise of the world’s reserve currency, the US dollar.