WSJ Nick Timiraos: Has the Fed Ever Cut by 50 Basis Points in 'Peacetime'?
One argument for cutting rates by 25 basis points, or 0.25 percentage point, instead of 50 basis points goes like this: The Federal Reserve only makes larger cuts when something is going wrong in the economy or financial system.
And that’s partly true, but it also misses an important point.
Since the Fed began to publicize interest-rate changes in 1994, the central bank has moved from a neutral stance to a cutting stance six times.
The Fed initiated shallow cutting cycles in 1995, 1998, and 2019, each time leading off with a cut of 25 basis points.
The Fed began what would be deeper cutting cycles three times, in early 2001, 2007, and when the Covid-19 pandemic began to spread in March 2020, each time leading with a cut of 50 basis points.
This has led many analysts to conclude that larger cuts of 50 basis points are “reserved” for more severe situations, and there is some truth to this pattern.
Stock markets were sliding as the tech bubble began to deflate with the Fed cut rates in January 2001 by 50 basis points. The bursting of a subprime mortgage-credit bubble in August 2007 preceded the Fed’s cut of the same magnitude in September 2007.
At the same time, Fed officials at both of those meetings still thought their more aggressive action might preempt a downturn, according to the transcripts of those meetings. In other words, just because 50-basis-point cuts look, in retrospect, like actions reserved for the start of a recession, officials didn’t think that way in real time.
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