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The Federal Reserve appears to be following the same path as in 1995, according to TS Lombard.
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That sets the stage for the economy to avoid a recession like the one that occurred in the 1990s, the firm said.
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It’s also great news for stocks, as the S&P 500 has doubled in value over the decade.
The Federal Reserve is following a 30-year-old pattern with its interest rate moves, and that’s good news for the U.S. economy, according to TS Lombard.
The firm highlighted the central bank’s 50-basis-point cut to the federal funds rate this week. That was exactly what investors were looking for and could set the stage for a stock market and economic boom, according to Dario Perkins, the firm’s managing director of global macroeconomics.
He notes that the Fed’s latest rate cut has created a parallel to what central bankers did in 1995, when Fed officials cut the federal funds rate from a peak of 6% to around 4.75% over three years. That brought interest rates back to a neutral level, prevented a recession and ultimately triggered a new economic boom.
By 1998, GDP growth had accelerated from 4.4% to nearly 5%. Meanwhile, the S&P 500 soared 125% by the end of the Fed’s cutback cycle, according to data from the American Institute for Economic Research.
Federal Reserve officials appear to be on track to make the same move, Perkins suggested, attributing this week’s massive rate cut to central bankers’ belief that they were further from neutral than they were several decades ago.
“Our view is that this cycle of cuts will likely play out like the ‘recalibration’ of monetary policy that Greenspan undertook in the mid-1990s,” Perkins said in a note Wednesday. “Even if the U.S. labor market deteriorates more than we expect and the Fed lags behind, there is no real threat of a deep recession.”
Stocks rose a day after the big rate cut. Despite swings in the hours after the Fed’s rate decision, major indexes hit new records in Thursday trading.
“We think a soft landing is still very much in the cards,” Perkins added. “And while the danger of the Fed falling behind the curve is real, we think the fallout would be manageable. It’s hard to foresee anything worse than a mild recession,” he later wrote.
Some analysts remain cautious about the Federal Reserve’s latest monetary policy move, fearing that cutting interest rates too quickly could trigger a new bout of inflation. But the market has largely downplayed that risk, with one-year inflation expectations hovering just above 2% in September, according to data from the Cleveland Federal Reserve.
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