Author: Craig Adeyanju
Estimated read time: 3 minutes
Publication date: 6th Sep 2019 11:18 GMT+1
The U.S. Federal Reserve cut target rate to the 2% to 2.25% range on July 31, saying at the time that the move was only a "recalibration" necessitated by the Trump administration's trade policy and "not the beginning of a long series of rate cuts". However, a member of the Federal Open Market Committee (FOMC) James Bullard, who is also the president of St. Louis Federal Reserve recently said the Bank should cut target interest rates by 50 basis points when the committee meets in two weeks. FOMC is the Federal Reserve committee that makes decisions on interest rates.
Pointing to the fact that the current target rate of 2% to 2.25% is higher than the current yield on all U.S. Treasury assets, Bullard argues that the current target rate remains high. If the FOMC decided to further trim the target interest rate in two weeks when it meets, it safe to say the recalibration may not be ending soon, especially as long as the treasury yields remain lower than the interest rate. It may be time to consider the following types of stocks, which typically perform well in monetary policy easing cycles.
A declining interest rate ultimately makes the cost of borrowing lower. Consumers, for instance, start to see credit offers at lower interest rates, thereby, freeing up extra income to spend on consumable items. So it may be time to consider retail chains like Target Corp. (NYSE: TGT), Costco Wholesale Corp. (NASDAQ: COST).
While a lower interest rate is good for consumers, it discourages fixed-income investors who're always after yield. This increases the demand for blue-chip dividend stocks that offer mouthwatering yield, which could result in higher stock prices. You can use the Finscreener "Best Dividend Stocks" screener as a starting point for researching the dividend stocks to buy.
Declining interest rates are likely to discourage foreign investments and this could lead to lower demand for the U.S. dollar. This ultimately weakens the value of the currency, a situation that has historically boosted commodity prices. This makes commodity stocks a good target when the Fed is easing its monetary policy. Interestingly, some commodity stocks like Exxon Mobil Corp. (NYSE: XOM), and BHP Billiton (NYSE: BHP) are also reliable dividend stocks.
On a cautionary note, you should remember that central banks only cut interest rates to provide support for the economy. Therefore, a series of rate cuts could be indicative of a potential recession. You may want to conduct deeper due diligence on the securities that are looking to buy to benefit from a rate cut. For instance, a stock with heavy exposure in a single market for revenue, even if it’s a good dividend stock, may not be fare well in a recession.
Disclaimer: Craig Adeyanju is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.
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