The Federal Open Market Committee cut its benchmark rate to a range of 4.75% to 5.0%, its first reduction since March 2020, after leaving borrowing costs at a more than two-decade high for over a year.
In the past, most of the Fed’s monetary easing cycles were triggered by financial crises that quickly morphed into economy-wide credit crunches, which caused recessions, said analysts at Yardeni Research, in a note dated Sept. 17.
Since 1960, the Fed reduced the federal funds rate (FFR) by more than 500 bps during the average easing cycle.
So it’s no wonder that the FFR futures market is increasingly expecting another 200 bps of cuts, after Wednesday’s 60 bps cut, over the next 12 months.
However, most previous easing cycles started from much higher FFR levels, Yardeni Research added. Additionally, the Fed only cut the FFR by 25 bps three times during the 1995 easing cycle, the most recent soft landing.
“In our opinion, lowering the FFR too much too fast could trigger an economic boom, in which real GDP grows at a brisk pace but with higher inflation risks. It could also trigger a 1990s style meltup in the stock market,” Yardeni added.
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