Be Careful What You Wish For: The Danger of Rate Cuts

With the Federal Open Market Committee having paused its interest rate hikes for the past several months, everyone expects that the current level of the federal funds rate is the highest it will be, and that rate cuts will follow eventually. Right now expectations are for rate cuts to start either in March or in May.

Wall Street is salivating at the idea of rate cuts, as it envisions a flood of easy money flowing into the financial system, bringing about a never ending stock market boom. But the reality of rate cuts could be far different than Wall Street’s hopes for them.

Federal Reserve Rate Cuts During Times of Recession

The recent history of Federal Reserve rate cuts is anything but good. In each of the last three recessions, rate cuts have presaged the start of a recession.

1. The 2020 Recession

Thanks to COVID, hardly anyone remembers that 2019 saw the beginning of weakness in markets that could have manifested as a severe recession in 2020. The Fed began cutting rates in July 2019, then had to step in to inject billions of dollars in liquidity into overnight repo markets in September 2019.

Interest rates continued to be cut towards the end of the year, and were held steady until the reality of COVID showed itself. The recession that could have happened was essentially short-circuited through the shutdowns, which brought about their own recession.

The Fed continued to cut rates and engaged in massive monetary stimulus which ended up resulting in high inflation that peaked in 2022 and continues to pester us. And it continued to blow up a bubble that could burst this year and lead to another severe recession.

2. The 2008 Financial Crisis

The 2008 financial crisis was precipitated by weakness in the housing market that spread to financial markets thanks to the securitization of mortgages. And this crisis, too, was preceded by Federal Reserve rate cuts.

The Fed had raised rates from 1% in 2004 to 5.25% in 2006, then left rates there for about a year. But the damage of those low rates, themselves a response to the bursting of the dotcom bubble, had already been done.

Once the housing bubble began to deflate, and financial institutions that were exposed to failing mortgages began to experience difficulties, the Fed once again began a series of rate cuts. The first cut was in September 2007, a 50 basis point cut.

From then on the Fed continued to cut through 2008, still maintaining that it would keep the US economy out of recession. As we know from hindsight, however, the recession actually started in December 2007, so the Fed was actually cutting rates in the middle of a recession.

Rather than stopping a recession from occurring, the Fed’s rate cuts began only a few months before the recession started, and continued during the recession. If this pattern were to continue today, the Fed’s first rate cut could indicate the imminent onset of a recession, while further rate cuts might indicate the deepening and worsening of that recession.

3. The Dotcom Bubble Collapse

The dotcom bubble grew in the late 1990s as the adoption of the internet spurred a wave of optimism throughout the economy. In response, the Fed began to raise interest rates to try to keep stock markets from overheating.

The result was a collapse of the bubble, which had become highly speculative as dotcom startups with shoddy business plans reliant on investor funding suddenly found themselves out of money.

Here too the Fed started to cut rates before the recession actually began. Whereas the recession began in March 2001, the Fed began its rate cuts in January 2001, and continued cutting through the end of the year.

4. The 1990 Recession

For all you old-timers, let’s throw in another recession and head back to the recession before the dotcom bubble, the 1990-91 recession. The Fed was a little late to the game this time around, starting to cut interest rates in July 1990, for a recession that began in July 1990 and lasted until March 1991.

But the Fed wasn’t done cutting by March, when interest rates were 6%. Instead, it continued to cut until September 1992, when it dropped interest rates to 3%.

So as you see, for the past 30+ years, the Fed’s rate cuts have almost always come right before or right at the beginning of a recession. For those hoping for the Fed to start cutting rates, they may get more than they wished for.

Is Recession Guaranteed?

If there’s one thing to say about the next recession, it’s that it’s taking its sweet time developing. Most people thought 2023 would be the year of recession, and now many people are expected the recession to hit in 2024.

There’s no doubt that both businesses and households are pessimistic about the future of the economy. With higher levels of indebtedness and less purchasing power, the strength of the US consumer is giving out.

Business earnings forecasts are sliding, many businesses are starting to cut jobs, and with the potential for a Middle East war there are numerous potential headwinds that are facing the economy.

Many Americans have already started to try to protect themselves against the possibility of recession, and they’ve done so by buying gold and silver. Gold and silver have served as safe haven assets for centuries, protecting wealth through both good times and bad.

Goldco has helped tens of thousands of our customers safeguard their financial security with gold and silver. With over $2 billion in precious metals placements and over 5,000 5-star reviews, Goldco goes the extra mile to provide quality gold and silver coins and exceptional customer service.

If you’re worried about what might happen once the Fed starts cutting rates, you’re not alone. Call Goldco today to learn more about how you can put gold and silver to use helping you during the next recession.