The Federal Reserve’s (Fed) policy committee cut its policy rate by 25 basis points (.25%) yesterday to a target range of 1.75%–2%. This comes on the heels of the first rate cut in more than 10 years at the end of July. This cut is somewhat more controversial, however, because the overall U.S. economic data has been improving, and inflation has been ticking higher.
Some economists have been expecting as much as a 50 basis point (.50%) reduction in this round, and a smaller group was predicting no cut at all. So the Fed’s decision to “split the difference” is like a baseball player hitting a line drive into center field landing just beyond the infield. Hardcore baseball fans might know this as a bloop hit.
So in the final analysis, we should pay attention to how the Fed members actually voted. There were two dissenting voting members at the July rate cut, and once again there were two votes opposed to today’s cut—but unlike last time, there was also one dissenter who favored a larger 50 basis point (.50%) cut. Materials in the economic projections indicated 10 of 17 participants (which includes non-voting members) did not believe additional cuts would be needed over the remainder of the year, although evolving economic conditions could certainly lead to a shift.
“History does not repeat itself, but it rhymes.”
– Mark Twain
Looking back at the previous two recessions (2001 and 2008), the Fed cut rates 50 basis points (.50%) to kick off the new cycle of rate cuts. We looked back at what the Fed said at the time, and policymakers didn’t foresee a recession; the larger .50% cut might have been their way of showing how worried they really were at the time. In other words, maybe the Fed knew there potentially was trouble under the surface.
Compare this with three consecutive 25 basis point (.25%) cuts in the 1995/1996 and 1998 rate cut cycles, which led to continued equity gains and avoided recessions. Given we foresee one more cut this year, could it be another three cuts of 25 basis points (.25%) and then an economic acceleration?
“Here’s the catch. When the first two cuts in a new cycle of rate cuts are only 25 basis points, this could be the Fed’s way of truly viewing the cuts as insurance,” explained LPL Financial Senior Market Strategist Ryan Detrick. “In fact, the past five cycles of cuts that started with two 25 basis point cuts saw the S&P 500 Index move higher 6 and 12 months later every single time.”
As shown in this LPL chart, Stocks Have Historically Done Well If The First Two Fed Rate Cuts Are 25 Basis Points, the S&P 500 was up an average of 9.7% six months after the second of two 25 basis point cuts to kick off a new cycle of rate cuts. Going out a year, the S&P 500 had gained a very impressive average of 16.7%.
What Does the Cut Mean for You?
Remember: rate cuts and other economic factors are taken into account when developing your financial strategy. It’s a bit like driving to a vacation destination: when plotting out your trip, it’s wise to take factors like slow traffic, construction detours, and other “unknowns” into account. Arriving at your goal means anticipating the unanticipated.
That’s why I’m here.
I am always available to talk about your goals and how economic events may or may not change the roadmap of your financial strategy. Feel free to give me a call or send me an email anytime.
Managing Partner / Account Executive