MacroResearchBoard

Late-Cycle Relief From The Fed – February 4, 2019

Late-Cycle Relief From The Fed

The Fed’s shift to a pause in its rate cycle is a clear positive for risk assets, which are still oversold in most cases. Accordingly, having recommended gradually increasing equity exposure earlier this year, we upgraded equities to overweight and trimmed cash. Even though an equity pullback may develop in the very near run, we do not expect a re-test of the December lows.

While we recognize that the investment cycle is well advanced, history provides some perspective on the impact of late-cycle relief from the Fed. The 1997-1998 financial crisis was resolved when the Fed briefly cut interest rates three times beginning in September 1998 (while also organizing a bailout of LTCM). The equity bubble built further over the next 15 months. The Fed also very briefly cut rates following the 1987 stock market collapse, which was the first demonstration of the “Greenspan put”. This week’s shift to the sidelinesh ighlights that the “put” is now Powell’s.