How Gold, Oil, Stocks & USD Perform During FOMC Rate Cut Cycles
FEDERAL RESERVE RATE CUT CYCLES & MARKET PERFORMANCE – SUMMARY POINTS:
- The Federal Reserve has shifted its monetary policy stance to provide looser financial conditions as the US economy faces growing downside risks amid ongoing trade war uncertainty
- FOMC rate cuts have historically produced mixed returns across assets like gold, crude oil, the S&P 500 and US Dollar
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The Federal Reserve is set to meet on October 30 after announcing back-to-back interest rate cuts in July and September. The US central bank is likely to continue along its path of providing more accommodative monetary policy amid ongoing trade war uncertainty, which has created daunting headwinds for economic growth and largely fueled ballooning recession fears. In fact, according to the latest overnight swaps pricing pulled from Bloomberg, traders are estimating an 85.3% probability that the FOMC cuts rates by another 25-basis points later this month.
The July FOMC meeting revealed the central bank’s first rate cut in over a decade, which was chalked up by Fed Chair Powell to be a “mid-cycle adjustment” and “insurance against mounting downside risks.” Although, markets continue to push yields lower in response recent economic data like dismal readings on the ISM manufacturing and services PMI reports. In turn, there is serious potential that the Fed’s hand will be forced to cut rates further from the current 1.75-2.00% target rate range before the year is over.
IS THE FED ENTERING A CYCLE OF INTEREST RATE CUTS?
The Federal Reserve’s stated dual mandate that governs the central bank’s decisions encompasses price stability and full employment. While the downside risks chiefly contributing to slowing global GDP growth remain unresolved, the potential that economic fundamentals deteriorate further cannot be discounted and may encourage additional interest rate cuts down the road.
Correspondingly, with inflation continuing to run below the Fed’s target amid fermenting recession fears induced by the recent US Treasury yield curve inversion, the central bank will likely press onward by lowering borrowing costs in hopes of incentivizing consumption and business investment. That said, another Fed rate cut could suggest the scale is tipping away from a “mid-cycle adjustment” in lieu of a full-blown series of accommodative policy measures.
Alas, in a sequel to our original analysis on stock market returns when the Fed cuts rates, the tables and graphs below detail how various assets like gold, crude oil, the S&P 500 and US Dollar have historically performed when the Fed enters a cycle of interest rate cuts.
GOLD PRICE RETURNS WHEN THE FED CUTS RATES
CRUDE OIL PRICE RETURNS WHEN THE FED CUTS RATES
S&P 500 INDEX RETURNS WHEN THE FED CUTS RATES
DXY US DOLLAR INDEX RETURNS WHEN THE FED CUTS RATES
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