FEDERAL RESERVE RATE CUT CYCLES & MARKET PERFORMANCE – SUMMARY POINTS:
- The Federal Reserve has shifted its monetary policy stance to provide looser financial conditions as the US economy faces growing downside risks amid ongoing trade war uncertainty
- FOMC[1] rate cuts have historically produced mixed returns across assets like gold[2], crude oil[3], the S&P 500 and US Dollar[4]
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The Federal Reserve[6] is set to meet on October 30 after announcing back-to-back interest rate cuts in July and September. The US central bank is likely to continue along its path of providing more accommodative monetary policy amid ongoing trade war uncertainty, which has created daunting headwinds for economic growth and largely fueled ballooning recession fears. In fact, according to the latest overnight swaps pricing pulled from Bloomberg, traders are estimating an 85.3% probability that the FOMC cuts rates by another 25-basis points later this month.
The July FOMC meeting[7] revealed the central bank’s first rate cut in over a decade, which was chalked up by Fed Chair Powell to be a “mid-cycle adjustment” and “insurance against mounting downside risks.” Although, markets continue to push yields lower in response recent economic data like dismal readings on the ISM manufacturing and services PMI reports[8]. In turn, there is serious potential that the Fed’s hand will be forced to cut rates further from the current 1.75-2.00% target rate range before the year is over.
IS THE FED ENTERING A CYCLE OF INTEREST RATE CUTS?
The Federal Reserve’s stated dual mandate that governs the central bank’s decisions encompasses price stability and full employment. While the downside risks chiefly contributing to
