Is the US Fed Easing Monetary Policy into an Economic Boom?
The Federal Open Market Committee has started its latest rate-cutting cycle, reducing its benchmark rate to a range of 4.75% to 5.0%. Yardeni Research questions whether the US central bank is easing monetary policy into an economic boom.
Historically, Fed monetary easing cycles have been triggered by financial crises that lead to economy-wide credit crunches and recessions. Since 1960, the Fed has typically reduced the federal funds rate by more than 500 bps during an easing cycle.
The FFR futures market now anticipates another 200 bps of cuts in the next 12 months, following the recent 60 bps cut. However, previous easing cycles began at higher FFR levels, with the Fed only cutting by 25 bps three times during the 1995 easing cycle.
Yardeni Research warns that lowering the FFR too rapidly could result in an economic boom with increased inflation risks and a stock market meltup reminiscent of the 1990s.
In conclusion, the Fed's current rate-cutting cycle raises questions about the potential impact on the economy and financial markets. Investors should closely monitor developments and adjust their strategies accordingly to navigate potential risks and opportunities.