Insights


Chart of the Month: Can Mid-Cycle Rate Cuts Renew the Bull Market?

Source: Federal Reserve Bank of St. Louis, Morningstar

Market Observations

Slowing global growth, muted inflation pressures, and escalating trade tensions have raised concerns about a sharper than expected slowdown in the U.S. economy. This has led the market to quickly anticipate Fed rate cuts in the months ahead. While the Fed typically cuts rates when bad things are happening in the economy, it is not unusual for policymakers to lower interest rates as “insurance“ against rising recession risks. 1995 and 1998 are two examples of when the Fed preemptively reduced rates to buffer against any economic weakness. The 1995 mid-course correction was initiated to help the economy achieve a soft landing as inflation pressures quickly subsided. In 1998, the Fed lowered rates to mitigate against any economic impact from the Mexican and Russian debt defaults and the near collapse of hedge fund manager, Long Term Capital Management (LTCM). In both instances, the stock market continued to rally. While Fed chairman Powell has pledged to act as appropriate to sustain the economic expansion, market participants may be wondering if the Fed’s dovish policy tilt and potential insurance rate cuts will be enough to prevent a significant slowdown. If the Fed is successful and recession fears recede, stock prices could remain elevated. However, if economic conditions continue to deteriorate, stock prices at current valuations may be vulnerable.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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