Are Interest Rate Cuts still good for Financial Markets?

Good Morning Ladies and Gentlemen

”I fear that there is no voluntary return in the history of mankind.”

“The Count” in Robert Musil’s The Man Without Qualities (first edition)

U.S. Federal Reserve

The U.S. Federal Reserve Bank has responded to the recent slowdown in inflation by implementing its first key interest rate cut in over four years. On Wednesday, the Fed reduced the interest rate band by 0.5% to 4.75% to 5%. This significant cut is accompanied by indications from the U.S. central bank of further interest rate reductions this year. While a more relaxed monetary policy was expected, there needed to be more certainty about whether the central bank of the world’s largest economy would opt for this substantial interest rate cut or take a more cautious approach by only reducing interest rates by 0.25%. In last week’s “Stefan’s Weekly,” I anticipated a 0.25% reduction, which was also reflected in future prices at that time.

Why financial markets like interest rate cuts

Rita asked me why I had written in my last “Stefan’s Weekly” that interest rate cuts are great news for financial markets. The reason is, that the recent significant interest rate cut by the US Federal Reserve and the two cuts by the European Central Bank are positive news for the economy. Reduced interest rates translate to lower costs for short-term loans. Investors and economists anticipate that lower interest rates can stimulate economic growth because it becomes more advantageous for individuals and companies to borrow money. Consequently, companies can achieve higher profits, making the economy more resilient. Consumers are likely to increase their spending as lower interest rates make them feel more financially capable of making major purchases or investing in their children’s education. Businesses can also capitalise on lower interest rates by securing more favourable financing for their operations, acquisitions, and expansions, potentially leading to increased future profits and higher share prices. Sectors that offer high dividends and businesses requiring substantial capital stand to benefit the most from lower interest rates. Nevertheless, companies with steady cash flows and strong balance sheets can also gain from more advantageous debt financing.

Next week

The good news is that there is more to come; at least, that is what I think. The Swiss National Bank will probably be the last to cut interest rates this month. Next week, I expect them to lower base rates by 0.25%.

My Thoughts for the Weekend

Ladies and Gentlemen, progress should only be considered meaningful if it contributes to added value and, notably, increased prosperity for the general population. Additionally, the traditional understanding of right and left in politics needs to be re-evaluated, as the population appears much more fragmented in many aspects than it was during the last decades. We may need new parties alongside established ones with new offerings. I often wonder if things are as grim as many people perceive them to be or not as dire as they appear. However, living in Switzerland and working in Liechtenstein certainly influences my thinking and my point of view.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

I wish you an excellent start to the day and the weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li