In a recent article in The Wall Street Journal, Sam Goldfarb explains the counterintuitive outcomes that have occurred after the Fed’s rate cut. The crux of all this, I think, is here:
“In fact, the choice might have even helped drive yields higher, according to some investors. In opting for the larger reduction, the Fed signaled that it was willing to fight to keep the economy out of a recession, which would almost certainly lead to even bigger cuts.
At the same time, officials signaled they were optimistic about the economy and most likely will cut rates by only a quarter point at future meetings.”
Traditionally, a 50 basis point cut has signaled a problem. So, the Fed doing a 50bps cut will alarm, but at the same time, Jerome Powell is attempting to calm the market by telling everyone that it’s all part of the plan. But that doesn’t really align with the Fed’s rate cut history.
Since 1971, there have been 299 rate-changing decisions made by the FOMC, with 132 of them rate cuts. Of those rate cuts, 59 were 50bps or more. Those were all clustered around recessions and big economic shocks. (see the attached chart).
Action Line: The clear answer to the Fed is a gold standard, where they need to follow the rules of the road accordingly and not be treated as rock stars. Click here to subscribe to my free monthly Survive & Thrive letter.
Read the entire series here.
