$BTC DTCK) The Fed is following a 30-year-old strategy with its interest rate moves, and that's good news for the US economy.
The US Federal Reserve's 50 basis point cut to the federal funds rate this week is exactly what investors are looking for and could set the stage for a booming stock market and economy, according to macroeconomic forecasting consultancy TS Lombard.
Dario Perkins, managing director of global macro at TS Lombard, noted that the Fed’s latest rate cut drew parallels to what the Fed did in 1995, when Fed officials eased the federal funds rate from a peak of 6% to around 4.75% over three years. That brought rates back to neutral, staved off a recession and eventually sparked a new economic boom.
By 1998, GDP growth had accelerated from 4.4% to nearly 5%. Meanwhile, the S&P 500 index soared 125% by the end of the Fed's rate-cutting cycle.
As Fed officials are on track to make a similar move, Perkins said this week’s big rate cut is because the central bank believes current interest rates are farther from neutral than they were a few decades ago.
“Our view is that this rate-cutting cycle will likely play out like the policy recalibration during former Fed Chairman Greenspan’s tenure in the mid-1990s… Even if the US labor market deteriorates more than we expect and the Fed follows the market, there is no real threat of a deep recession,” he said.
We think a soft landing is still very much in the cards…And while the risk of the Fed following the market is real, we think the fallout will be manageable. It’s hard to foresee anything worse than a mild recession,” he added.
Some forecasters remain wary of the Fed’s latest policy move, worried that cutting rates too quickly could spark a new wave of inflation. But markets have largely shrugged off that risk, with Cleveland Fed data showing inflation expectations for the next year still hovering just above 2% in September.