DataTrek Research co-founders Nicholas Colas and Jessica Rabe have stated that if the Federal Reserve implements loose monetary policies this year, the market is likely to face a downward risk of economic recession.
The Federal Reserve (Fed) chose to “stay put” as expected by the market at 3:00 am this morning, maintaining the federal funds rate for the fourth time in the range of 5.25% to 5.5%.
Although the Federal Open Market Committee (FOMC) stated in its policy statement that inflation remains high and needs to be closely monitored, officials deleted the language considering “any additional policy tightening” from last month’s statement, effectively ruling out the possibility of future rate hikes.
Federal Reserve officials have previously stated that due to gradually meeting inflation pressures and a strong labor market, it is expected that the Fed will cut interest rates twice this year, with the first cut potentially occurring in Q3.
However, according to the report by DataTrek Research co-founders Nicholas Colas and Jessica Rabe on Tuesday (31), if the expected loose monetary policy materializes this year, investors are likely to face the downward risk of economic recession.
Linked to the Fed’s meeting dates, interest rate futures show that the market expects the Fed to cut interest rates six times by the end of 2024, or 150 basis points, with a probability of lowering rates to 3.75% to 4%, currently at 36.7%.
Nicholas Colas and Jessica Rabe’s report states that:
DataTrek Research strategists explain that loose monetary policies did indeed drive significant stock market gains between 1985 and 1986, with the S&P 500 rising 31% and 18% respectively during these two years. However, on October 19, 1987, after another rate cut announcement in the US, the market experienced the devastating “Black Monday,” with the S&P 500 plummeting 20% in a single day and the Dow Jones Industrial Average falling as much as 23%.
In conclusion, Nicholas Colas and Jessica Rabe state that the stock market has already shown unsustainable risks of over-expansion this year, and a rate cut of more than 1 percentage point without an economic recession has no precedent.