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According to TS Lombard, it appears the Fed is following the same path as it did in 1995.
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This will prevent the economy from experiencing a recession like the one that occurred in the 1990s, the company said.
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It’s also good news for stocks, as the S&P 500 more than doubled in value over that decade.
The Fed is following a 30-year-old playbook with its interest rate measures, and that’s good news for the US economy, according to TS Lombard.
The firm pointed to the central bank’s 50 basis point cut in the federal funds rate this week as just what investors were looking for and could set the stage for a booming stock market and economy, said Dario Perkins, the firm’s managing director of global macro.
He notes that the Fed’s latest rate cut has created a parallel to what central bankers did in 1995, when Fed officials lowered the federal funds rate from a peak of 6% to about 4.75% in three years. That brought interest rates back to neutral, averted a recession and ultimately sparked a new economic boom.
By 1998, GDP growth had accelerated from 4.4 percent to nearly 5 percent. Meanwhile, the S&P 500 was up 125 percent by the end of the Fed’s rate-cutting cycle, according to data from the American Institute for Economic Research.
Perkins said Fed officials appear poised to pull the same maneuver. He attributed this week’s massive rate cut to central bankers’ belief that they were further from neutral rates than they were a few decades ago.
“We believe this cycle of austerity is likely to play out like Greenspan’s ‘recalibration’ of policy in the mid-1990s,” Perkins said in a note Wednesday. “Even if the U.S. labor market deteriorates more than we expect and the Fed falls behind the curve, there is no real threat of a deep recession.”
Stocks rose a day after the big rate cut. Despite reeling in the hours following the Fed’s rate move, major indexes hit new records in trading on Thursday.
“We think the soft landing is still a big problem,” Perkins added. “And while the danger of the Fed falling behind the curve is real, we think the fallout would be manageable. It’s hard to see anything worse than a mild recession,” he later wrote.
Some forecasters are still wary of the Fed’s latest policy move amid concerns that cutting rates too quickly could spark a new surge in inflation. But the market has largely shrugged off that risk, with inflation expectations for the coming one-year holding just above 2% in September, according to data from the Cleveland Fed.
Read the original article on Business Insider
