U.S. stocks surged to within 1% of an all-time high on Tuesday. No way the Fed can cut rates now, right?
Well, consider a not-so-short history of the central bank doing just that.
From Alan Greenspan through Ben Bernanke, the Federal Reserve has cut a dozen times with equities within 2% of a record: June 1989, July 1989, July 1990, March 1991, August 1991, October 1991, November 1991, September 1992, July 1995, December 1995, January 1996 and October 2007.
Dotted lines on the above chart denote occasions when the S&P 500 was less than 2% from a record, while solid lines indicate that stocks closed at a record the day of the reduction.
One explanation for the Fed’s repeated decision to ease monetary policy with markets in relatively good shape is that economic conditions don’t always jibe with stocks -- at least not at the start of the last six easing cycles.
This speaks to the discretion central bankers have in acting and responding to perceived changes in the outlook for the world’s largest economy. In fact, their framework tells them they have to be forward-looking, since monetary policy has a delayed and variable effect.
This means that a worsening outlook -- whether it’s due to temporary issues like trade or more long-term concerns like persistently slow inflation -- could be sufficient reason to ease monetary policy.
There’s almost somewhat of a circular reasoning at play: equities are resilient in part because investors have priced in Fed easing, and investors expect the Fed to ease because they believe stocks will fall if they don’t.
European Central Bank President Mario Draghi added a global dynamic to this conundrum on Tuesday by indicating that he was prepared to take policy rates even further below zero. The overnight rally extended when U.S. President Donald Trump indicated that he would be meeting with his Chinese counterpart Xi Jinping at the G20 Summit at the end of this month.
This story provided by Bloomberg News.