The Federal Reserve's decision to cut interest rates by 50 basis points yesterday has people wondering whether this could lead to another recession.
The last two times they cut rates by more than 50 basis points, the economy fell into recession within months.
History is not on the Fed's side.
The first was on January 3, 2001. The result? Over the next 448 days, the S&P 500 fell nearly 39% and the unemployment rate rose 2.1%.
The recession that followed was linked to the bursting of the dot-com bubble and worsened after the September 11 attacks.
Then, on September 18, 2007, they did it again. Another 50 basis points were cut, and the S&P 500 plunged 54% over the next 372 days.
Unemployment spiked to 5.3%. The recession lasted until mid-2009, worsened by the collapse of the housing market and the global financial crisis.
But here's the thing. This time, the signs are a bit mixed. Inflation has eased, falling below 5% in August.
The Fed’s target is 2%, and the Fed’s policy committee believes it is on track with recent adjustments. But the labor market is in trouble. The unemployment rate rose to 4.3% in August from 4.1% in June, a three-year high. Still, the unemployment rate is relatively low compared to previous recessions.
GDP growth in the second quarter came in at 3.0% year-on-year, up sharply from a modest 1.4% growth in the first quarter. But economists predict it could slow to around 0.6% in the third quarter, as high prices and high interest rates weigh on consumer spending.
The Fed’s goal of a soft landing may be harder than it thinks. Comparing current economic indicators to those from 2001 and 2007 adds to the concern.
In September 2024, the Federal Funds Rate is between 4.75% and 5.00%. Before the 2001 recession, it was around 6.5%. Before 2007, it was around 5.25%. The current unemployment rate is 4.3%. Before 2001, it was 4.0% and before 2007, it was 4.6%.
Despite these similarities, several factors suggest that a recession is unlikely. The Fed argues that the risks are balanced. It sees the labor market and inflation as stable, unlike in the past when severe imbalances led to economic collapse.
However. History shows that rate cuts of this magnitude ALWAYS lead to recessions. If the Fed avoids it, it will be the first time.
Market shows initial positivity, crypto, quite un
The stock market is often a leading indicator of the health of the economy. After the 2001 rate cut, the S&P 500 fell nearly 40%. The Nasdaq lost about 80% of its value. The market panic was exacerbated by corporate scandals like Enron and the September 11 attacks. It took years for the market to recover.
During the 2007-2009 recession, the S&P 500 fell about 57%. The financial crisis led to massive sell-offs and large institutions requiring government bailouts. Investor confidence was shattered. The recovery was slow and painful, with many stocks not returning to pre-crisis levels for nearly a decade.
Yesterday, the market initially reacted positively to the cut. But this optimism may not last.
Meanwhile, the crypto market didn’t react the way investors hoped. Ether couldn’t even break above $2,500, and Bitcoin only reached $62,000 from $60,000. Not exactly the big bullish catalyst we were hoping for.
So what could happen now? In the next three to six months, if unemployment continues to rise and consumer spending falls, a recession could begin.
If current trends continue, the gradual slowdown could lead to a recession within six to 12 months.
On the other hand, if the situation stabilizes, consumer spending and inflation are controlled, the US economy could avoid a recession.
