How US rate cuts are misleading traders

As an avid trader and financial journalist, I've been growing more and more concerned with interest rate and inflation reports coming from the US over the last two years. My deep-dive research has revealed layers of conflicting signals that are seldom covered in the morning financial news. If you are forecasting based on the optimism of Fed Chair Jerome Powell, then you might be basing your trading decisions on falsehoods.

So what is the reality of trading rate cuts, and what do rate cuts indicate?

Is the US economy healthy?

First, let’s explore the question many traders ask me. Is America collapsing or thriving? As you read this article, keep in mind that an economically disadvantaged population doesn’t mean a fiscally bankrupt nation. America has enormous resources and a prominent place on the global scene,  so even if the doom and gloom that we are seeing around the US persists, it doesn’t mean that the American society and economy are balancing on the edge.

It means that we traders are obliged to confirm or question news from US sources and not blindly accept it.

At the moment, the Fed is insisting that the US economy is strong and healthy. Financial news outlets parrot the Fed’s outlook with optimism, but if you switch the channel to local news, you’ll see a very different picture.

Life in the US looks bleak for many Americans. Rural towns are dying and major cities are overrun with drug epidemics. Homelessness is on the rise and city street crimes dominate the nightly news in many states. All across America, two-income families are struggling to pay the bills as rent and groceries reach impossible highs. Does this sound like a country that is thriving?

The US Jobs report

The Fed’s major points of positivity are jobs/unemployment data. An increase in jobs is said to be a clear indicator of economic growth. Here’s where it gets interesting. The standard U-3 unemployment rate doesn’t reflect the amount of jobless Americans. It counts people actively and unsuccessfully looking for a job.

So, according to the Fed, the fact that fewer people in the US are looking for a job means the American economy is strong.

It gets worse. The US Jobs report doesn’t account for jobs lost. It only accounts for ‘new’ jobs. If 200,000 people lose their jobs this quarter, but 10,000 new positions are created, the Q2 jobs report will show a nice optimistic 10,000 new jobs. It will not show a net employment change of 190,000 job losses.

In other words, the widely publicized job report shows nothing and serves only as a tool to promote a narrative that the US economy is growing.

There’s even more. What about all those extra jobs that Powell and President Joe Biden are so proud to speak about? Did the US government really create millions of jobs over the last three years? According to factcheck.org, the answer is no. 20 million US jobs were paused when COVID shut down the whole world. After the lockdown was lifted, Americans started returning to work, and the government used those ‘new’ jobs as a positive note.

And with thousands of unintended arrivals every day ready to join the US unemployment line, resources are getting overstretched.

US debt on the rise

National debt is rising, and while the Fed proudly announces that consumer spending is high, they neglect to mention that credit card spending is out of control. Even more interesting is that inflation is eroding purchasing power, so Americans are forced to spend more just to put dinner on the table—also not accounted for in the Fed's rosy picture. And the misdirect doesn’t end there.

The US national debt has been increasing at a significant rate. As of March 2024, it was reported that the US national debt is rising by about $1 trillion every 100 days. The nation’s debt stands at over $34.6 trillion at the time of writing. This accelerated pace of debt increase started around June 2023. Before that, a $1 trillion increase took about eight months. Does that sound healthy to you?

Rates and bonds

Traditionally, central banks maneuver interest rates to control inflation, which in turn affects bond yields. When central banks raise interest rates, it’s generally to temper high inflation. Higher rates make borrowing more expensive, cooling off spending and investment, and theoretically slowing down inflation.

On the flip side, when interest rates are cut, it's an effort to stimulate spending and investment by making borrowing cheaper, ideally to ward off economic slowdowns. This has direct implications for bond markets. New bonds issued after a rate increase tend to have higher yields, attracting investors seeking better returns.

Conversely, existing bonds issued at lower rates suddenly look less attractive, often resulting in price drops as investors flee to newer, higher-yielding bonds. However, the plot thickens when we consider the real-world mechanics and the ripple effects of these economic policies.

For instance, when interest rates drop and investors start dumping bonds, yields on existing bonds actually rise in response to falling prices—an aspect that is counterintuitive and often underappreciated. Moreover, when rates rise, it’s not just about new bonds becoming more attractive; it’s also about the increased costs of government borrowing impacting everything from fiscal policies to national debt levels.

The common narrative of today suggests that changes in interest rates directly influence USD and, by extension, the broader economy in predictable ways. Yet, in my experience, the reality is more complex. Interest rate cuts or hikes often have a limited and immediate effect on USD, serving more as triggers for market sentiment rather than fundamental shifts in currency value.

Which assets might rate cuts affect?

Jerome Powell indicated that rate cuts are unlikely in the near future due to stalled progress on reducing inflation, which remains well above the Fed's 2% target. Given Powell's stance, US interest rates are likely to remain elevated. This scenario can impact several Exness assets:

XAU pairs typically have an inverse relationship with the US dollar. A stronger dollar could put gold prices under pressure, making it a key asset to watch for potential trading opportunities on drawbacks, especially around key resistance and support levels.

Forex currency pairs like EURUSD, GBPUSD, and USDJPY could see increased volatility. A strong dollar might lead to a depreciation of the euro and pound but could bolster the yen if risk aversion increases in global markets.

Conclusion

The Fed is sticking to the narrative that America has a strong and growing economy. Keep in mind that while superficial metrics like GDP growth and job creation often paint an optimistic picture, they may not fully capture the underlying economic realities.

As traders, we must challenge ourselves to look deeper than the conventional information offered by news outlets. This can not only guard us against market myopia but also equip us with the insights to anticipate and react more adeptly to market movements. Remember, in trading, as in life, the deeper your understanding, the better your position to capitalize on what lies beneath the surface.

For now, question any source that promotes a healthy US economy. Stick to the Exness risk-free demo account when testing theories related to US assets, and be very mindful of your leverage settings. Future Fed releases and media reports will surely influence everything related to USD during and immediately after the announcements, but be cautious about assuming new trend formations as market sentiment-related rallies and crashes are often short-lived.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.