The furore over the US Federal Reserve's cut in interest rates may be over but the key is now to judg...
The Federal Reserve Board last night cut the Fed Funds rate by 0.5% to 4.0%, the lowest rate since May 16, 1994 when it was 3.75%. This is the fifth 0.5% easing since the beginning of the year and at 2.5% in just over 4 months represents the most aggressive easing cycle since December 1982 when the Fed cut the discount rate 2.5% in four months.
Della-Porta says that in an accompanying statement the Fed intimated that they are less likely to make a rate adjustment in between meetings but gave no indication that they have finished cutting rates.
In a comment directed toward those who foresee rising inflation, the Fed said that inflation pressures "remain contained" at this stage which squares with the strong pick up in unemployment seen last week that is unlikely to boost chances of pay rises.
"The stock market traditionally rejoices in the additional liquidity stimulation and has risen on average by 25% on 10 of the last 11 times there has been a 30% or more cut in interest rates," says Della-Porta.
"The fact that yesterday's news was greeted with a yawn by the stockmarket is more to do with the fact that in the last 6 weeks the Nasdaq has rebounded some 37%, while the broader S&P 500 has risen 16%." This has put the market in an overbought position in the short term.
Della-Porta says the steeper yield curve which signals the markets' expectation of a resumption in economic growth bodes well for a recovery in corporate profits later this year or early next.
"That and the Fed's focus on weakening corporate profits mean that additional rate cuts are probable at the June 27th FOMC meeting. Both factors lead us to expect the market to work itself higher through the rest of the year."
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