Sharpen the Federal Reserveâs rate-cutting sickle.
Market expectations are growing for a cut to benchmark interest rates, which currently stand at a range between 2.25% and 2.50%, and strategists at Bank of America donât think that the market is going to be disappointed.
âHistory suggests the Fed typically cuts swiftly and does not disappoint market expectations at the outset of a cutting cycle.â
In a report dated June 6, Mark Cabana, rates strategist, Joseph Song, U.S. economist, and currency strategist Adarsh Sinha at BAML, said history offers a clear guide on how rate cuts tend to play out in the coming six-month period once the market starts to price in a rate reduction.
Read: MarketWatchâs snapshot of the market
Presently, Wall Street is pricing in a 65 basis point cut by the end of this year, representing two rate reductions of a 25 basis points each by the Jerome Powellâs central bank.
The BAML analysts said that analysis of the past five rating-cutting cycles, 1989-92, 1995-96, 1998, 2001-02 and 2007-08, point to the first rate cut taking place as soon as September.
The attached chart shows a the number of days before the Fedâs first interest-rate cut, in 1995, 1998, 2001, and 2007.
Mounting expectations for a Fed rate reduction, coming only after Powell & Co. delivered the most recent interest-rate increase in December, are supported by a number of factors: combating recessionary signs; boosting stubbornly low inflation, running below the Fedâs 2% target; addressing market anxieties; and, confronting the headwinds produced from the U.S.âs trade conflicts.
Expectations for a rate increase have juiced a stock-market that has been in a tailspin, driving the Nasdaq Composite Index
Â to its first correction, defined as a decline of at least 10% from a recent peak, since October.
Hope for a rate cut, however, have buoyed stocks in recent trade, with the Dow Jones Industrial Average
Â on pace for its fourth straight gain and the Nasdaq and S&P 500 index
Â on track for their third advance in a row.
Anticipation for a rate cut are also reflected in the yield on the 10-year Treasury note
which stands at 2.10%, near a 21-month nadir, as prices for the debt rally. Gold futures
meanwhile, were surging, hovering near its highest level since Feb. 20. Bond assets tend to rally when expectations for rate increases are growing.
To be sure, betting on a prevailing backdrop of easier monetary policy is risky, particularly when a rate-hike cycle commences. David Rosenberg, chief economist and strategist at Gluskin Sheff, said that its important not to be too eager to buy stocks after the first cut because the Fed tends to hike more than once and the performance of the overall market can depend on whether the economy slips into a recession.
Rosenberg says its better to wait because returns are likely to be richer later. So, patience will be a virtue for investors.
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