• The Federal Reserve is expected to cut rates .25% on Wednesday
• The US economy showed better than expected growth in Q2 at 2.1%
• Still, the Federal Reserve is concerned about slow global growth and trade tensions and will likely make a preemptive cut to keep the economy on track.

The Federal Reserve is expected to cut rates by a quarter of a point this Wednesday. This would be the first rate cut in ten years. The bond market has already priced in the rate cut. The stock market has pressed toward new highs in the meantime. Let’s break it down.

Operating earnings for the US have remained strong so far this year. Seventy percent of companies that have reported for Q2 have beat expectations. A large number of companies will report in the next two weeks, so we’ll keep a close eye on this.

On July 26th, the Commerce Department reported that Q2 GDP was 2.1%, exceeding consensus expectations. US consumer spending was very strong, growing 4.3%. The jobs report coming out Friday is expected to be positive. The unemployment rate is running just 3.7%.

With all of this good news, why would the Federal Reserve cut rates? Trade tensions and uncertainty about a possible economic downturn are weighing on businesses. Exports fell 5.2% in the most recent data and domestic investment fell 5.5%. Businesses may be pulling back based on uncertainty so a rate cut could help build some confidence.

Some fear that cutting rates now will take away any ability for the Federal Reserve to deal with a downturn if one arrives. Proactive central banking policies have arguably pressed global rates to near zero. Concern over persistent long term low inflation rates are a concern for the Federal Reserve because they have a very limited ability to deal with deflationary pressure. At this point, the US equity markets have been reacting positively to rate cut expectations. The jobs report on Friday and earnings data over the next few weeks will likely carry weight as well.