The FOMC voted to begin lowering the Fed Funds Rate in July. They voted to lower rates again in September. Some market commentators have started to cite this shift in policy direction as a sign that economic growth should improve, and risk assets should outperform. Looking at the history of prior periods, the trajectory of the economy and risk assets depends on how much the FOMC has to lower the Fed Funds Rate.
Since 1971, the FOMC has lowered the Fed Funds Rate more than once (easing cycle) 14 times. The FOMC has lowered the Fed Funds Rate more than three times (and 75bs or more) five separate times. In these periods, a recession occurred every time. There were several periods in the 1980s when the FOMC lowered the Fed Funds Rate by a large percentage in fewer than three meetings. This was mostly attributable to much higher starting interest levels (often larger than 10%). This makes comparisons to the current time period difficult, as the FOMC began lowering the Fed Funds Rate from 2.5% in July. We still find this analysis helpful because it suggests that when the FOMC has to lower interest rates multiple times (more than three adjustments) and by a meaningful amount (more than 75bps), the economy is weaker than forecasted and needs more accommodation. Historically, this coincided with the end of cycles and recessionary periods.
As previously mentioned, the FOMC voted to lower the Fed Funds Rate twice, a total of 50bps. They are meeting again on October 29 and 30th. The futures market is pricing in another rate cut at the October meeting and there is a greater than 50% chance of another rate cut at the March 2020 meeting. If this were to happen, history would suggest that the FOMC is going to adjust their outlook, become more accommodative than originally anticipated, and the chances of the US economy entering a recession in 2020 will increase.
Watching the Fed Futures market and other rates that adjust based on expected changes in the Fed Funds Rates, like the two-year Treasury, are a good way to monitor investors’ expectations for future FOMC moves.
1971: 2 cuts for 75bps
1974-1975: 6 cuts for 775bps (recession started in November 1973, ended March 1975)
1976: 2 cuts for 75bps
1980: 2 cuts for 1150bps
1981: 2 cuts for 800bps
1982: 4 cuts for 550bps (recession started July 1981, ended in November 1982, rate cuts started in July 1982)
1984: 3 cuts for 350bps
1985-1986: 3 cuts for 250bps
1987-1988: 2 cuts for 75bps
1989-1992: 18 cuts for 675bps (recession started July 1990, ended March 1991)
1995-1996: 3 cuts for 75bps
1998: 3 cuts for 75bps
2001-2003: 13 cuts for 550bps (recession started March 2001, ended November 2001)
2007-2008: 10 cuts for 500bps (recession started December 2007, ended June 2009)
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Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC