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Market News

Currency Devaluation Amidst Controversial Rate Cuts

While the general public may not be as involved day-to-day, investors and financiers are indeed anxious about the current state of international currency fluctuation and potential currency devaluation. The nation is, in fact, in a state of currency devaluation manipulation.

Many people and news outlets claim that new international tariffs, set to increase long overdue funds on imports and exports, are to blame. The entire geopolitical scene, unfortunately, takes the criticism for potential currency devaluations and the controversial decisions on rate cuts when, in fact, these actions are generally based on financial results.

In the case of China, it is noted that for many years China has weakened the Yuan, which boosts their own exports. A similar situation has taken place in Europe with the Euro. In a recent CNBC interview with President Trump regarding China, he states, “They devalue their currency. They have for years. It’s up to them at a tremendous competitive advantage, and we don’t have that advantage because we have a Fed that doesn’t lower interest rates.” Trump has repeatedly requested the Fed lower the federal fund rate since taking office.

United States International Competition business and global economic fighting or world trade war in a 3D illustration style.

Currency War?

President Trump stands behind his “America First” promise to place the United States in a more advantageous position, even if it sets the country in a possible currency war. With a devaluation
of the dollar along with overdue tariffs, other countries might feel the same pain as the US has over recent years.

A one-quarter percent tariff on Chinese production or a German auto are just a few ways in which President Trump has indicated he could cut the US trade deficit and increase revenue. The problem is, our international partners can weaken their domestic currency, lowering the value of the exported merchandise. When a new US tariff is added, the prices of goods are ultimately the same. In this way, the US experiences currency manipulation by the country in order for them to skirt the tariff.

As an example:

If the US places a 25% tariff on pair of $100 running shoes from China, the price would go up to $125. If the country decides to respond by devaluing their currency at 20% against our dollar, their cost won’t change but the value of the shoes is now only $80. When the US tariff is applied, the new price is about the same as the original price, and the tariff is avoided.

After competing countries take this approach back and forth, the economy suffers and trade wars increase. It has already happened within the last ten years among international trading partners. Historically, in the worst-case scenario, this type of trade conflict could evolve into a military conflict.

Help From The Fed

The Federal Reserve has the power to help in most cases. Because the Fed has the potential to strengthen the dollar or weaken the dollar, they have much control. It was recently reported the Fed posed potentially two rate cuts soon (see When The Fed Cuts Interest Rates, Stuff Happens), in which case worldwide central banks will react— the question is how.

Generally, the Fed will gradually raise federal fund rates incrementally by a quarter of a percent until they normalize, leaving room to lower them in the case of a recession. The recent economic tension has prompted the announcement of the upcoming one-quarter percent rate drop even though we are experiencing a robust market with minimal-to-no inflation. The Fed is not exempt from political controversy as the President makes his best effort to advise based on his experience.

Even a good economy, low unemployment, and record job availability do not stop people from fearing a recession. With help from the Fed in a slight rate slash, the economy has a better chance of
maintaining itself. Of course, then the risk of inflation sets in as the labor markets tighten. We are not out of a trade war either. It’s a time of uncertainty even when we have many certainties.

Alternative Investments In Uncertain Times

There is one secure way in which consumers, financiers, and investors can respond during uncertain economical and geopolitical times. With currency devaluation and rate changes on the forefront, your financial portfolio can change in an instant. Have you thought about an investment in gold or silver— while prices are obtainable? Let Reagan Gold Group share an alternative investment opportunity. Consider a gold IRA or other precious metals option. Gold is going up, while silver is still extremely reasonable. While rising inflation and devaluation of the dollar generally raise the prices of precious metals, you still have time to invest in a product that gives you greater control in uncertain times. It is a great time to look into retirement investments that can help you navigate securely

Composition with 50 gram gold bar, banknotes and coins.through the years ahead.

Categories
Market News

When The Fed Cuts Interest Rates, Stuff Happens

 

The July 2019 announcement by the Fed to expect an upcoming cut in interest rates has businesses, consumers and financiers alike responding in one way or another. The Federal Reserve has the power to make a rate change that impacts many facets of our economy as well as investors and borrowers. A rate cut in particular, while predicted at only a quarter of a percent in the coming months, will produce some interesting results for many. Let’s consider why the Federal Reserve cuts interest rates in the first place and how they go about it.

Why Do The Feds Cut Interest Rates

When the Federal Reserve chair suspects risks in the US economy, an interest-rate cut is usually imminent. In the case today, according to an article in the New York Times, Chairman Jerome Powell believes the US faces new risks and uncertainties due to impending trade wars and a worldwide economic slowdown even though the US economy is currently stronger than ever.

Other factors the Fed considers in terms of an interest rate cut include modest price gains. With inflation up 1.5% at the end of May, this figure is below their 2% target. Weaker prices present a problem with higher-risk deflation that could harm the economy. Then rates can’t go much lower in the case of a downturn. Slower wage growth is also a factor for the Fed. Even while unemployment rates are at a 5-decade low, wages to support new jobs have not significantly increased as expected when there are fewer workers than jobs.

How Do The Feds Do It

The Federal Open Market Committee (FOMC) meets eight times per year to discuss monetary policies, review the current economic state, and potentially set a new rate. Keep in mind; the federal funds rate is “the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis,” according to Investopedia. They state, “The FOMC makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation, recession, or other issues.” Once the FOMC members decide on the new rate, The Federal Reserve Chair sets a target date and also testifies before the US Senate Banking Committee. On June 19, the FOMC made this statement, “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

How Does a Federal Rate Cut Impact Consumers and Investors?

A federal interest rate cut can help or hurt consumers and investors. Sally Krawcheck, the Co-Founder and CEO of Ellevest, said it best in a CNBC interview (see article), “While it’s hard to predict, generally, a rate cut is good for borrowers, bad for savers, and mixed for investors.” Consider how a rate cut may impact you: Credit Card Interest Rates. Credit cards with variable rates that are connected to our prime rate (generally 3% above the federal fund rate) are impacted. An increased rate by the Feds causes credit card rates to go up, costing consumers more. This, in turn, causes consumers to buy less and slow the economy. On the other hand, a drop in the federal rate would generally be a plus for credit card holders.

Certificates of Deposit (CDs). If you hold certificates of deposits (CDs), an increased rate by the feds may be to your advantage. CD rates generally follow interest rates. The impact may depend on whether you own a short- or long-term CD, and taking inflation into account.

Jobs and Wages. The labor markets and employment are vital topics for the FOMC in their regular meetings. They use payroll, the labor force, and length of unemployment in part of their decisionmaking. When the Fed raises rates, a slowdown in the economy is expected. Fewer people are hired, and pay raises may come to a standstill for a time.

Mortgage Rates. While it is possible for some mortgage rates to go up with a Fed increase on shortterm rates, it is also common for rates to fall. History shows unexpected outcomes for mortgage rates between 2004 and 2019. This is an area that is not as easy to predict, based on the central banks’ actions and other factors.

Retail Prices. Federal interest rate changes impact the prices you pay for goods and services, which in turn impacts peoples’ desire to spend. When costs are low, and money is available, demand goes up along with prices. Even with all of the good news today for the economy, the labor market and unemployment, the Fed worries about wages going up and impacting inflation. The Fed then raises the rate to fight inflation.

Savings Accounts. While savings accounts and other retirement accounts are again hard to predict when a rate change is announced, it is possible that annual percentage yield (APY) will decrease for saving account holders depending on the contract with your banking or financial institution.

Gold and Silver Investment To Offset Federal Rate Changes

When the Federal Reserve slashes interest rates, the prices of gold and silver go up. When interest rates go up, the prices of gold and silver go down. When you want to make a sound investment for your future that is not severely impacted by the government, consider precious metals. You have more control over your assets, and they are certain to take you through every economic transition. Check in with Reagan Gold Group for a long-term investment plan with integrity. Now is a great time to make a gold or silver investment, before the next federal rate hike and while prices are reasonable. Buy gold or silver now for a sensible retirement alternative that gives you more control of your assets.