The Federal Reserve has already once been criticized for acting too late last December and raising interest rates too late- it may be under the scanner for the same now, ignoring warning signs for an impending recession in the same way it did in 2007.
The economy has seen an inverted yield curve, slower GDP growth, a full on trade war between U.S. and China, and a stock market bubble that could burst anytime soon.
Back in 2007, the yield curve was also inverted while U.S. economic growth was much lower than it had been the previous year the same way it is now. At the same time, the S&P made a new high in July 2007 as it did in the same month this year. Then, there was the August correction (same as 2019), and a projected Fed rate cut ironically on the same date- September 18.
"If this is the beginning of a full-blown rate-cutting cycle by the Fed, stocks don't do well after the first cut," Mike Wilson, equity strategist at Morgan Stanley, said in a research note. "On the other hand, if the cut is not associated with a further slowdown, but rather with a reacceleration or stabilization in growth, then equity markets have a chance to move higher."
The Fed delivered a widely expected 25-basis-point cut at its meeting on Wednesday evening, slashing rates the second time this year. Though the Federal Open Market Committee indicated the move should not to be seen as a foray into a prolonged easing cycle, the FOMC also said it "will act as appropriate to sustain the expansion."
"We wouldn't label this as a 'rate-cutting cycle,'" said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. "That would imply the U.S. economy is in need of a rescue, and we don't see this risk of a recession being too high right now."
However, even in 2007, officials believed growth would pick up, and that the economy would remain strong. In fact, Bernanke, the Fed chair at that time, had predicted positive growth for the next year. This somewhat optimistic attitude about the economy that was dismissive towards any fears is also mirrored in Powell's comments made on September 6: "We're not forecasting or expecting a recession," he said. "The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up. Our main expectation is not at all that there will be a recession."