15/05/2023
Even if the Fed were to bring rates down soon, an immediate bull run isn’t guaranteed.
History shows that stocks tend to perform tepidly following a pivot to rate cuts compared to a pause: The S&P 500 (SPX) has historically climbed 16.9% on average in the 12 months following the last hike of a Fed rate cycle and fallen 1% in the 12 months after the central bank first cut rates, Credit Suisse said in a May 9 note.
“Assuming that the May 3 rate increase was the last of this cycle, stocks should perform quite well through the remainder of the year. However, if the Fed were to ease in July — as the futures imply — the upside would be far more limited,” the analysts said.
Cutting rates prematurely could hold grave consequences for the economy.
Between 1972 and 1974, then-Fed Chair Arthur Burns hiked interest rates dramatically. Then, he cut them back down as the economy contracted.
When inflation later ripped higher, the Paul Volcker-led Fed took drastic action to push interest rates up to tame it. The effective Fed funds rates topped 22% by its peak in July 1981, and the central bank’s aggressive tightening helped trigger back-to-back recessions that drove the unemployment rate as high as 10%.
Powell acknowledged the missteps in a speech last August at Jackson Hole. The Fed has since signaled that it likely won’t lower rates this year and reaffirmed its commitment to tamping down inflation.
“I don’t think that the Fed is going to be in any hurry to cut rates this time,” said Marco Pirondini, US head of equities at Amundi.
That’s not to say that a Fed rate cut this year is completely out of the cards, said Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed eventually will want to lower rates back down, but it likely won’t want to do it at the historical pace it’s raised them over the past year, she says.
“They can slowly pace us down to 2.5% without the inflation monster rearing its ugly head again,” Webb said. “And I do actually believe it’s possible.”
