The Fed: If the Fed cuts interest rates during a recession, it would be ‘the worst of all possible worlds’

by | May 18, 2023 | Stock Market

If the economic storms get more difficult, traders and investors seem to think the Federal Reserve will be like a lifeguard and rescue all swimmers from the rip tides. Economists see such confidence as misplaced given the high inflation environment. In general, investors and traders have been steadfast in their view they can count on the Fed to come running at the first hint of a downturn.

Traders in derivative markets have partly walked back rate-cut expectations, but still see the fed-funds rate — now at 5% to 5.25% — falling back to above 4.5% by year-end. Behind this bet is the view that the central bank will pivot and lower rates at the first hint of a recession. After all, that was the Fed’s response after the last series of rate hikes in 2018- 2019.  But that’s not the playbook the Fed is following, economists say. The Fed has gone back to the lessons from the 1970s, the last time of high …

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