Many economists expect the Federal Reserve's latest quarter-point rate cut will be the last in a series that began in September. Global Insight expects the...
Many economists expect the Federal Reserve’s latest quarter-point rate cut will be the last in a series that began in September.
Global Insight expects the pause to be short, with a half-percentage point cut by year-end. JPMorgan economist Bruce Kasman expects the pause to last a year, followed by a 1 percentage point increase in rates over two quarters.
If history is a guide, the pause may last even longer. Thomas Higgins, chief economist of Payden & Rygel, says once the Fed reaches its low for the federal funds rate, it stands pat for an average 16 months before moving rates higher.
Sixteen months may seem long to those who argue low rates earlier this decade fueled the housing bubble. But Higgins says it takes nine months to a year for lower rates to boost borrowing and fully affect the economy.
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Past “on-hold” periods have favored riskier assets, such as stocks, over Treasury bonds. Since the 1970s, the Standard & Poor’s 500 has risen, on average, 15 percent during such periods, Higgins says.
Consumer staples and consumer discretionary stocks do particularly well, as stable rates support the dollar, says Merrill Lynch economist David Rosenberg.
To be sure, some predict there will be no pause. Calyon’s Michael Carey says weak economic readings could push the Fed to cut rates again at its meeting in June.
Cogs in the financial system, such as bank-to-bank loans, “remain dysfunctional” and may need greasing, Carey says.