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Why interest rate cuts won't 'stop the bleeding'

Cutting interest rates, “is kind of like treating a bleeding wound with a pain killer,” according to Schwab Center for Financial Research Vice President of trading and derivatives Randy Frederick, adding that what investors really need is an outcome to the U.S.-China trade war.

Frederick told Yahoo Finance’s On the Move that rate cuts, “make the patient feel better, but it doesn’t stop the bleeding.”

The hemorrhaging picked up Monday when the Dow Jones Industrial Average (^DJI) plummeted 767 points — its worst performance this year. It’s one reason the futures markets indicate investors expect as many as three more rate cuts this year now that the U.S.-China trade war has escalated.

President Donald Trump plans to impose a new 10% tariff on $300 billion worth of Chinese imports starting September 1 and the Chinese government has allowed the yuan to devalue hitting a low not seen in more than a decade.

Frederick, who once thought it hard to imagine the Federal Reserve would cut rates three more times this year, in a recent note to investors wrote, “If these new tariffs do indeed go into effect, I now think that is a very real possibility.”

Trump pressures Fed to cut rates

Trump’s latest Twitter tirade Wednesday against the Fed followed news that central banks in Thailand, New Zealand and India cut interest rates more than analysts expected.

Trump urged the Fed to cut rates and end its balance sheet reduction program known as quantitative tightening. The Fed actually did end quantitative tightening August 1, two months earlier than it planned, a point the president either ignored or missed.

“Like it or not, the president’s Twitter feed is likely to continue to ‘trump’ all other factors in determining market direction, and traders must remain ever diligent of that fact,” says Frederick.

Markets need trade certainty, not another cut in rates but, “trade certainty is probably not coming anytime soon,” according to Frederick, who warns investors to prepare for more stock market volatility.

“Trump has every incentive to postpone this thing all the way out to the next year’s election,” he said pointing out that both sides, China and the U.S., are further apart than ever to forging a trade agreement.

Frederick says other factors are also weighing on markets which have been slow to accept new realities.

“The markets have been pricing in for a very long time that Brexit was going to get resolved favorably, that the USMCA [the United States-Mexico-Canada Agreement ] would get passed and that the U.S. would resolve its trade issues with China,” he said.

So far, none of those things have happened and Frederick says investors only recently woke up to that fact.

Adam Shapiro is co-anchor of Yahoo Finance On the Move.

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