History shows U.S. stocks falling more than 20% as Fed initiates rate cuts

History shows U.S. stocks falling more than 20% as Fed initiates rate cuts.


A senior official at the US Federal Reserve cautioned on Tuesday against initiating interest rate cuts prematurely, despite recent progress made against inflation.

The Fed has swiftly elevated interest rates to a 23-year peak as part of its efforts to curb inflation and bring it closer to the long-term target of two percent.

While policymakers at the central bank hinted late last year about deliberating on when it might be appropriate to commence reducing the Fed's benchmark lending rate, sparking market optimism about potential cuts as early as March, Fed Chair Jerome Powell has recently conveyed strong indications that a rate cut in March is highly improbable. This stance has prompted financial markets to reevaluate their expectations regarding the timing of rate reductions.

Joining Powell in tempering expectations of imminent cuts, Loretta Mester, the Cleveland Fed president and a voting member of the Fed's rate-setting committee this year, emphasized the importance of exercising caution.

In prepared remarks delivered at a conference in Ohio, Mester stated, "It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to two percent."

She emphasized that the Fed's rate-setting committee does not anticipate initiating rate reductions until it has acquired "greater confidence" that inflation is steadily progressing in the right direction.

Although the likelihood of a rate cut in March is now deemed highly improbable, futures traders have assigned a 65 percent probability that the Fed will commence interest rate cuts by the subsequent decision on May 1, according to an analysis of data from CME Group conducted by AFP.

Mester expressed confidence that if the US economy continues to evolve as anticipated, the Fed will be positioned to "begin moving rates down" later in the year. She underscored her expectation for a gradual pace of rate adjustments to effectively manage risks associated with the Fed's mandate.