Skip to Content
The current expansion has lost some steam, but the Fed's shift toward potential easing should be viewed in context.

Interest Rates not Restrictive Main

In response to recent softening in the economic outlook, the Federal Reserve has now clearly opened the door to cut its policy rate in an effort to stimulate the economy. In turn, investors may question what a rate cut may signal about the Fed's rationale for trimming rates and about the expansion's durability.

It's important to understand the rationale for any potential Fed easing in context. Growth has moderated, but the baseline view is for continued expansion. Recent recessions were preceded by Fed tightening that pushed short-term interest rates above the rate of nominal GDP growth. As illustrated above, that is far from the case today.

In the graph above, we would highlight two mid-cycle rate cuts of note in the 1990s. In 1995, the Fed eased following a 16-month period in which it had doubled its short-term policy rate and long-term yields had declined. An additional cut in 1998 was intended to provide stability in direct response to the Asian financial crisis. Following those cuts, nominal GDP accelerated by more than 1.5%, helping to extend an expansion that would go on to set a record for its length.

Can the Fed do it again? It increasingly appears that is what policymakers have in mind.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.