Be Careful What You Wish For: Risks of Fed Rate Cuts

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Carroll discussed Be Careful What You Wish For: Risks of Fed Rate Cuts. Here’s an excerpt from the episode:

Jake: Jim, it seems like it’s the sort of implicit Fed put seems like would be a pretty big finger on the scale of this. Everyone knows the Fed has their back, so what do I need to insure myself against like the Fed will insure for me?

Jim: Well, and I think that’s the attitude that a lot of people have, is the Fed is going to– If we go back to Bernanke, you know subprime is contained [laughs]. The Fed is working to contain this, whether it’s through the rescue of the regional banks back in the Spring of last year, whether it’s trying to walk the tightrope of what’s next for interest rates, lots of jawboning going on. We’ll see. I think the market still thinks that the right path is for the Fed to cut rates. It’s looking less and less likely that we sure ain’t going to get six this year. Are we going to get five, four, three, two, one, I don’t know.

Tobias: Do they typically cut when the stock market is at an all-time high and unemployment is at an all-time low? Is that usually the way they do it?

Jim: Well, if you look back and–

Jake: Don’t forget trillion-dollar deficits on top of that.

Jim: Yeah, if you look back in time. And obviously, it’s a small data sample because the Fed’s only been around for 100 years or so. But when the Fed cuts rates, it’s typically because the economy needs relief and it tends to be too late for the stock market. You know if you go back to global financial crisis, if you go back to the internet collapse, go back to any time the Fed has cut rates, it’s typically in concert with the stock market going down.

Jake: Horse has already left the barn.

Jim: Yeah, the horse has already left the barn. It’s like if you look at a chart of Fed funds rate versus the two-year or something like that. You know the two year tells you what direction we’re going in, and then the Fed catches. So, all of these people hollering for the Fed to start cutting rates, it’s one of those be careful you might not want what you’re asking for. Because if the economy is strong, which it appears to be, if inflation is not, if that dragon has not been slain, then they’re going to conclude that they can’t cut rates yet. So, higher for longer, at least in some form shouldn’t surprise people, but people like to be surprised, I guess.

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