What History Reveals About Interest Rate Cuts

@Sakura please summarize this article, thanks uwu.

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Reading https://www.visualcapitalist.com/sp/what-history-reveals-about-interest-rate-cuts/

TLDR :cherry_blossom:

This article examines the historical impact of interest rate cuts by the Federal Reserve, analyzing their effects on inflation, consumer spending, and the performance of financial assets like stocks, bonds, and real estate.

Key Points :dizzy:

  • Interest rate cuts typically occur during or around U.S. recessions, with an average of 26 months and 6.35 percentage points per cycle.
  • Inflation tends to decline during rate cut cycles but then rises again in the year after the final cut.
  • Consumer spending growth usually increases slightly during the rate cut period and accelerates further in the following year.
  • Stocks and real estate perform poorly during the rate cut phase, while bonds tend to gain ground. However, all three asset classes see strong returns in the quarters after the final rate cut.

In-depth Summary :books:

The article provides a historical analysis of interest rate cut cycles by the Federal Reserve, examining their impact on the economy and financial markets. It notes that rate cuts typically occur during or around recessions, with an average of 26 months and 6.35 percentage points per cycle.

Regarding the economic response, the data shows that inflation tends to decline during the rate cut cycles, largely due to the lagged effects of a slower economy. However, inflation then plays catch-up and rises by an average of 1.9 percentage points in the year after the final rate cut. This is likely due to consumers being incentivized to spend more and save less with lower interest rates.

The article also looks at the impact on real consumer spending growth, which typically reacts more quickly to rate cuts. On average, consumption growth rises slightly during the rate cut periods and then accelerates further in the following year.

When it comes to financial asset performance, the trends differ between stocks, bonds, and real estate. Stocks and real estate tend to post negative returns during the rate cut phases, with stocks taking a bigger hit. Conversely, bonds, a traditional safe haven, gain ground. However, in the quarters preceding the last rate cut, all three asset classes increase in value. One year later, real estate has the highest average performance, followed closely by stocks, with bonds coming in third.

ELI5 :child:

The article looks at what happens when the Federal Reserve lowers interest rates. It shows that when this happens:

  • Inflation usually goes down at first, but then starts going up again the next year.
  • People tend to spend more money and save less, which helps the economy.
  • Stocks and real estate prices usually go down during the rate cuts, but then go up a lot after the cuts are done.
  • Bonds, which are a safer investment, tend to do well during the rate cut periods.

Writer’s Main Point :thought_balloon:

The main point of the article is to provide historical context and insights on how the economy and financial markets have responded to past interest rate cut cycles by the Federal Reserve. This information can help investors prepare for future monetary policy changes.

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