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May 23, 2024 Graphics & Design What History Reveals About Interest Rate Cuts
The Federal Reserve has overseen seven cycles of interest rate cuts, averaging 26 months and 6.35 percentage points (ppts) each.
We’ve partnered with New York Life Investments to examine the impact of interest rate cut cycles on the economy and on the performance of financial assets in the U.S. to help keep investors informed.
A Brief History of Interest Rate Cuts
Interest rates are a powerful tool that the central bank can use to spur economic activity.
Typically, when the economy experiences a slowdown or a recession, the Federal Reserve will respond by cutting interest rates. As a result, each of the previous seven rate cut cycles—shown in the table below—occurred during or around U.S. recessions, according to data from the Federal Reserve.
Interest Rate Cut CycleMagnitude (ppts) July 2019–April 2020-2.4 July 2007–December 2008-5.1 November 2000–July 2003-5.5 May 1989–December 1992-6.9 August 1984–October 1986-5.8 July 1981–February 1983-10.5 July 1974–January 1977-8.3 Average-6.4
Understanding past economic and financial impacts of interest rate cuts can help investors prepare for future monetary policy changes.
The Economic Response: Inflation
During past cycles, data from the Federal Reserve, shows that, on average, the inflation rate continued to decline throughout (-3.4 percentage points), largely due to the lagged effects of a slower economy that normally precedes interest rate declines.
CycleStart to end change (ppts)End to one year later (ppts) July 2019–April 2020-1.5+3.8 July 2007–December 2008-2.3+2.6 November 2000–July 2003-1.3+0.9 May 1989–December 1992-2.5-0.2 August 1984–October 1986-2.8+3.1 July 1981–February 1983-7.3+1.1 July 1974–January 1977-6.3+1.6 Average-3.4+1.9
However, inflation played catch-up and rose by +1.9 percentage points one year after the final rate cut. With lower interest rates, consumers were incentivized to spend more and save less, which led to an uptick in the price of goods and services in six of the past seven cycles.
The Economic Response: Real Consumer Spending Growth
Real consumer spending growth, as measured by the Bureau of Economic Analysis, typically reacted to rate