How Big Will Rate Cuts Be?

On today’s show we are taking another look at interest rates. We’re taking a walk through history. In Wednesday’s Federal Reserve press conference, Chair Jerome Powell suggested that there could be a quarter point cut in interest rates in September if conditions warrant. He said that rate decisions would be data dependent and taken on a meeting by meeting basis. 

But I want to take you through history. We’re going to look at the Federal Reserve’s own data dating back to 1954. We would go back even further, but that’s as far back as the data series on the Federal Reserve Bank of St. Louis contains. 

When we look through history we see a consistent trend. Whenever the Fed cuts rates, they don’t do it gradually. The cuts are much faster than the increases. 

The graph looks a bit like a saw tooth with a gradual ramp upwards and followed by a sharp decline. We have had 12 periods of rate cuts since 1954. All of the rate cuts were steep and swift. Of the 12 rate cuts, 10 of them were associated with a recession. 

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