The Calm Before the Storm

The last time I felt compelled to use this title for a post, SPX plunged 105 points off its intraday highs within the next 24 hours.  This one should be more violent.

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All the talk about the necessity of a 50 bps rate cut (100 bps according to the president) got me to thinking about the history of such a drastic move. What were the circumstances under which the FOMC cut rates by 50+ bps in the past, and how did they stack up to today’s?

First, a quick history lesson. There have been seven such cuts since the tech bubble burst in 2000-2002. As the chart below shows, they all took place in 2007 and 2008 during the Great Financial Crisis. Most of them took place after the S&P500 had dropped precipitously from its October 2007 all-time highs.

The cuts, along with a handful of the more significant events occurring at the time, can be seen in the chart below.

The only 100 bps cut was in December 2008, a few days after QE1 was launched. By then, the S&P500 had plunged 45% from its highs. Q3 GDP had contracted -2.1% on its way to -8.4% in Q4. Almost 900,000 families had lost their homes to foreclosure and unemployment was 7.3% on its way to 10%. No one doubted the nation was in crisis.

As of Friday, the S&P500 is 1.6% off its all-time highs. GDP has grown 2.0% over the past year. Unemployment is 3.7%. I can’t remember the last time I saw foreclosure headlines. Interest rates are at historic lows, and the president insists the U.S. economy is “the best it has ever been.”

Is it really the right time for a 50 bps rate cut?

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