DataTrek Research co-founders Nicholas Colas and Jessica Rabe suggest that if the Federal Reserve (Fed) implements loose monetary policies this year, the market is likely to face downward risks of an economic recession.
The Fed, as expected by the market, chose to “stand pat” at 5.25% to 5.5% for the federal funds rate in the early hours of this morning (1).
Although the Federal Open Market Committee (FOMC) stated in its subsequent policy statement that inflation remains high and needs to be closely monitored, officials deleted the language from last month’s statement considering “any additional policy tightening.” This essentially eliminates the possibility of future rate hikes.
Fed official Bullard stated at the beginning of January that due to gradually meeting inflation targets and a strong labor market, the Fed is expected to cut interest rates twice this year, with the first cut possibly occurring in Q3.
However, according to a report by businessinsider, DataTrek Research co-founders Nicholas Colas and Jessica Rabe pointed out in a report on Tuesday (31) that if the market’s expected loose monetary policies are implemented this year, investors are likely to face downward risks of an economic recession.
Linked to the Fed meeting dates, interest rate futures show that the market expects the Fed to cut interest rates six times by the end of 2024, or 150 basis points, with a probability of rates dropping to 3.75% to 4%, currently at 36.7%.
Nicholas Colas and Jessica Rabe’s report states that DataTrek Research strategists explain that between 1985 and 1986, loose monetary policies did indeed drive a significant increase in the stock market, with the S&P 500 rising 31% and 18% respectively. However, on October 19, 1987, after another rate cut announcement in the US, the market experienced the infamous “Black Monday,” with the S&P 500 plummeting 20% in a single day and the Dow Jones Industrial Average falling as much as 23%.
In conclusion, Nicholas Colas and Jessica Rabe state that this year the stock market has already shown unsustainable risks of over-expansion, and without an economic recession, a rate cut of more than 1 percentage point has no precedent.