Investors expect multiple interest rate cuts from the Federal Reserve in 2024, but history suggests severe downsides for investors if policymakers fulfill those expectations before a recession hits. the last time the Fed moved aggressively before a recession hit and how it affected markets.
In the Fed funds futures market before a recession hit, investors expect interest rates to finish the year at 4.00%-4.25% and 37% for 3.75%-4.00%, which would represent five or six cuts in 2024.
By the end of this year, the benchmark rate would be in the 4.50-4.75% range, according to the Fed’s December 2023 Summary of Economic Projections.
In the last 44 years, the Fed has only cut rates by 1.25 points or more once without a recession either already underway or clearly imminent, DataTrek Research cofounders Nicholas Colas and Jessica Rabe wrote Tuesday.
Analysts pointed out that this policy easing cycle helped fuel massive stock rallies in 1985 and 1986, with the S&P 500 gaining 31% and 18% respectively.
A few days later, however, rate cuts were followed by Black Monday, when the S&P 500 and Dow tumbled 23% and 20%, respectively.
According to DataTrek, there has never been a precedent for more than 1.0 percentage point of rate cuts without an imminent recession.
To start the year, stocks have already soared, suggesting that the risk of overextending is high.
Since the start of the year, the S&P 500 has climbed 3.73%, the Dow is up 1.76%, and the tech-heavy Nasdaq is up almost 5%.
At lower absolute policy rates now, the Fed has even more reason to be cautious about the pace of rate cuts in 2024, Colas and Rabe write.
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