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Why U.S. Investors May Get That Third Fed Rate Cut After All

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The Federal Reserve doesn't currently look gung-ho about a third interest rate cut for 2019, but the argument for that cut is strong. 

Before we get into the reasons the Fed may want to cut, let's take a look at where things stand at present. 

Where Things Stand 

The current Federal Reserve dot plot, an investor's roadmap to the probability of rate movements and the direction of interest for the next year or so, shows a relatively even dispersion. This means, almost as many Fed members want interest rate cuts as those who  want to keep rates where the currently are. The current Federal Funds rate, the rate of interest at which financial institutions lend to each other in the overnight market, is a bit below 2%. 

The probability of another rate cut is 53%, according to CME Group's FedWatch Tool. 

The 10-year treasury yield is currently 1.71%, suggesting belief there will be another cut. 

The Current Risks 

Sure, we've all heard by now that uncertainty over the direction of trade has caused corporate executives to curb investment, which can restrict hiring. That's a risk. But with 70% of U.S. GDP coming from consumer spend rather than business spend, and the consumer currently on solid footing with 3.7% unemployment, what's the problem? 

"The consumer continues to drive this economic expansion, despite numerous risks to the outlook," wrote Jason Pride, chief investment officer of private wealth at Glenmede in a note out Monday. Those risks, as describe to TheStreet by its sources in the past month or so, are precisely the lower business spend. If the lower business spend reduces hiring, that strong consumer could soon weaken, a trend we haven't observed of late. 

Still, with interest rates falling through 2019, inflation of roughly 2% has been supported. 

The New Risks

Like a bulldozer, new pessimism has rolled into the fray in the last few days. 

News hit the wires Monday that the Eurozone's manufacturing activity index contracted, with a reading of 43 for September, missing economists forecasts of 47.3. Anything below 50 is a contraction. The EU has been hit particularly hard as a byproduct of the U.S. China trade war. 

Late last week, The OECD (Organization for Economic Cooperation and Development) lowered its global GDP forecast for 2019 to 2.9% from 4%. 

With U.S. President Trump recently saying he doesn't feel the "need" for a trade deal with China, tariffs set to go into effect in December on both the Chinese and U.S. side would indeed go into effect. That would put further pressure on the U.S. economy. Inflation of 2% could be threatened, and if the Fed wants to keep inflation around that growth level, it may want to cut rates. 

"The Fed cut rates as a measure of economic insurance, with more easing possible by the end of the year," Pride wrote. 

Where Does This Leave Stocks? 

The S&P 500 is up more than 19% year to date. Almost two weeks ago, stocks rose on trade deal optimism. They fell Friday after Trump's 'one eighty' of sorts on trade with China. Cleary, stock investors are giving more weighting to the trade war than they are to interest rates. 

Early on in 2019, stocks saw big bouts of buying, as rate cuts were priced in. 

Now, with a looser monetary and rough trade environment, another rate cut would "support" stock prices at current levels, rather than outright boost them, many on Wall Street are saying. 

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