The Last Two Times The Fed Led Off With A Half-Point Cut Were 2001 And 2007

Not Exactly The Best Precedent To Follow

The Fed opted for the larger 50 basis point rate cut to kick off its easing cycle and the markets seem to think that’s just dandy! I had speculated that the markets might get spooked if Powell went for a half-point move because it might signal that the Fed was falling behind. Maybe Powell sensed that or maybe conditions aren’t deteriorating that quickly, but he certainly went out of his way to convey a message of confidence, even though rate cuts usually signal a need to spark a slowing economy. The markets took off on Thursday, but seemed to back off and temper some of their optimism on Friday.

Where the markets head from here really depends on whether or not Powell was telling the truth. If everything really is in as good shape as he insinuated, there’s a good chance that stocks can continue to push higher if the economy can avoid recession and navigate a soft landing. If we are headed towards a recessionary environment (and credit conditions suggest that the risk is high), there’s a strong possibility that the S&P 500 could correct by 20% or even more. Investors clearly think by their reaction this week that it’s the former. I don’t necessarily share their optimism as deteriorating credit conditions are usually a strong precursor to an economic slowdown. And the Fed doesn’t usually start a rate cutting cycle with a 50 basis point move unless there’s some sort of core economic issue they’re concerned about.