The Federal Reserve Bank (Fed) is widely expected to cut interest rates on Wednesday, October 30, which would be the third cut this year after nine consecutive hikes.
The current fed funds rate target is 1.75–2%, with a 25 basis point cut likely happening this week. As discussed in Market Tricks and Treats, we think there will be only one more rate cut this year, and we don’t expect the Fed to take its policy rate below 1.5%, even in 2020.
It is important to note that the Fed started new cycles of rate cuts in 2001 and 2007 with 50 basis point cuts, implying they were more worried than they were letting on. Seeing that this cycle has had cuts of only 25 basis points so far, the cuts are being viewed more as “insurance” rather than warding off an impending recession.
“We’ve seen periods of economic slowdowns that had three consecutive 25 basis point cuts, most recently in the mid- and late 1990s,” explained LPL Financial Senior Market Strategist Ryan Detrick. “The good news is the economy accelerated after the slowdowns and stocks did quite as well.”
As the LPL Chart of the Day shows, stocks delivered impressive results after three initial 25 basis point cuts in 1975, 1996, and 1998, with the S&P 500 Index up more than 10% six months later and 20% a year later.
As history shows, we don’t have to fear more Fed rate cuts, instead they just might have bulls smiling.
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