A reader asks:
I know Ben talked about rate cuts and the stock market a few weeks ago but what about the economy? Did Powell just guarantee a soft landing by cutting 50 basis points this week?
There are no guarantees in life or the markets, unfortunately.
The rate cut helps the soft landing scenario but you never know with these things.
Let’s invert this question and start with what Fed rate cuts don’t mean.
Rate cuts don’t mean a recession is coming. Sometimes the Fed is forced to cut rates because of a financial crisis or slowing economy but rates cut in and of themselves don’t just happen during a slowdown.
Here’s a look at every Fed rate-cutting cycle going back to 1970:
It’s been a while since the Fed went on a rate-cutting spree outside of a recession, but Alan Greenspan and company pulled off a soft landing in 1995, which was followed by one of the biggest boom times in history.
A recession is possible but not the only potential outcome here.
Rate cuts don’t mean inflation is coming back. Some people are worried that inflation will rear its ugly head again after we just tamed it.
Again, anything is possible, but I would be dubious of people predicting higher inflation from interest rate cuts alone. We learned in the 2010s that low rates from the Fed don’t cause inflation:
We had 0% rates for years following the Great Financial Crisis. Rates averaged less than 1% in the 2010s yet the inflation rate for the decade was under 2% per year.
Government spending has a much greater impact on inflation than monetary policy.
Rate cuts don’t put a floor under equities. A lot of the Zero Hedge crowd assumes there has been a Fed put in place that drives