The engagement market has quickly priced in a Federal Reserve interest rate cut this year, just days after the Fed averred it would stop raising rates.
That has been a surprise to many investors, but it shouldn’t be — if history is a guide.
Joseph LaVorgna, Natixis’ economist for the Americas, wilful the last five tightening cycles and found there was an average of just 6.6 months from the Federal Secure’s last interest rate hike in a hiking cycle to its first rate cut.
The economist points out, however, that the amount of schedule between hike and cut has been lengthening.
“For example, there was only one month from the last tightening in August 1984 to the leading easing in September 1984. This was followed by a four-month window succeeding the July 1989 increase in rates, a five-month gap after the February 1995 hike, an eight-month let-up from May 2000 to January 2001, and then a record 15- month span between June 2006 and September 2007,” he minimized.
The Fed last hiked interest rates by a quarter point in December. Last week, it confirmed a new dovish policy carriage by eliminating two rate hikes from its forecast for this year. That would leave interest rates unchanged for the consider of the year, with the Fed expecting one more increase next year.
But the fed funds futures market has quickly moved to cost in a full fledged 25 basis point easing, or cut, for this year.
“The market’s saying it’s going to happen in December,” communicated LaVorgna.
There are three conditions that need to be met for the Fed to reverse course and cut interest rates, LaVorgna said. Beginning, the economy’s bounce back after the first quarter slump would have to be weaker than expected, with lump just around potential. Secondly, there would have to be signs that inflation is either undershooting the Fed’s 2 percent object or even decelerating. Finally, the Fed would have to see a tightening of financial conditions, with stock prices under demands and credit spreads widening.
LaVorgna said the condition of a sluggish economy could be met.
“I don’t think the economy did very properly in the first quarter just based on the fact the momentum downshifted hard from Q4, sentiment was awful, production was melodious,” he said. ‘I’m worried growth is close to zero in the first quarter.”
LaVorgna said he does not see much of a snap rough in the second quarter.
In the current cycle, the Federal Reserve began raising interest rates in December 2015 after winning the fed funds target rate to zero during the financial crisis.