Anticipated Federal Reserve rate cut tomorrow

Today, three major US market indexes ended higher as Wall Street bet the Fed will cut rate by at least 0.25 points tomorrow:

Dow Jones Industrial Average: up 0.5%

S&P 500: up 0.4%

Nasdaq: up 0.5%

Sure, this may seem like a rosy picture; a Fed rate cut is great, right? 

Not entirely. Let's look at some of the pros and cons of a rate cut. 

Pros

Fed rate cut will lower interest rate on loans. This is great for people/companies who need to borrow money or refinance existing loans. Since people have easier access to money, they are more willing to spend the money, thereby providing liquidity to the market which is needed to boost the economy. Similarly, companies can borrow money for their own investments (e.g. to expand business) as well as to complete transactions (e.g. mergers). Healthy companies lead to a healthy economy by providing employment and income for individuals (i.e. trickle-down theory).

Cons

Lowering the interest rate will further weaken the value of the dollar primarily because investors will not want to invest in a currency that is not yielding an attractive return. As of today, the exchange rate is approximately 1.44 euro: 1 dollar. Clearly, the European Central Bank (home of the euro) is a much wiser investment than the Federal Reserve (home of the dollar). Since the dollar is worth less, your buying power is reduced. A trip to Europe will be much pricier than before. It will cost you more to fill up on gas since the price of gas is pegged to the dollar. In other word, when the dollar weakens, the price of oil is cheaper for global investors since their currency remained the same. 

The declining dollar will help US exporters (since their goods will be cheaper in the global market) and harm importers (since they will have to pay more for the same items). In case you have not noticed, US imports heavily. Just think about how much of the stuff that Americans consumed were made in China. 

So there you have it, some basic points to keep in mind when thinking about the Fed's rate cut (I haven't even gotten into inflation yet!).

Now comes the big question, in anticipation of tomorrow's rate cut, should we cheer or fear?