THE FED IS IN A HISTORICALLY TIGHT SPOT
The FED’s move yesterday of an inter-meeting cut of a half percentage-point to a range of 1%-1.25% has some precedents, but not many. Intermeeting cuts, according to analysis by Bespoke, occurred in 1998, 2001, and 2008. These cuts were associated with other crises; the Asian Currency Crisis, the 9/11 attacks, and the Housing Meltdown of 2007-2009. The table below shows that the stock market has responded to these emergency cuts in mixed fashion, with the first reaction on the day of the cut being positive, on average +1.20% and then tailing off to losses on average over time. The average market performance has been -0.76%, +2.85%, +1.42%, -1.47%, and -8.47% after 1 week, 1 month, 3 months, 6 months, and 1 year, respectively.
Of course, the final tally will depend on many things including the severity of the Covid-19 epidemic and the Presidential election, but this moment in history is also unique in that although we are in the 11th year of an impressive expansion, the FED has very little wiggle room from here based on the charts below:
1. The 10-year yield is already at a new low as it has moved below the 2012, 2016, and 2019 lows. Money cannot get much cheaper (charts 1, 2, and 3).
2. In addition, the Fed Funds target is now headed back to historic lows (chart 4).
3. Finally, the FED’s balance sheet remains at a historic $4.15 trillion and is climbing after briefly moving lower from the 2018 all-time highs (chart 5).