The Fed is following its 1995 playbook — and that’s great news for stocks and the economy

The Fed’s cutting cycle in 1995 sparked an economic boom, with the stock market more than doubling in value.

The Fed is following a 30-year-old playbook with its interest rate moves — and that’s good news for the US economy, according to TS Lombard.

The firm pointed to the central bank’s 50 basis point cut to the federal fund rate this week. That was exactly what investors were looking for, and it could lay the groundwork for a booming stock market and economy, according to Dario Perkins, the firm’s managing director of global macro.

He notes that the Fed’s latest rate cut has created a parallel to what central bankers did in 1995, when Fed officials eased the Federal funds rate from a peak of 6% to around 4.75% over three years. That took interest rates back to a neutral level, stave off a recession, and ultimately spark a new economic boom.

By 1998, GDP growth had accelerated from 4.4% to nearly 5%. Meanwhile, the S&P 500 soared 125% by the end of the Fed’s cutting cycle, according to data from the American Institute for Economic Research.

Fed officials look on track to pull off the same maneuver, Perkins suggested, attributing this week’s jumbo-sized rate cut to central bankers’ belief that they were further away from the neutral rate than they were several decades ago.

“Our view is that this cutting cycle will probably play out like Greenspan’s mid-course ‘re-calibration’ of policy in the mid-1990s,” Perkins said in a note on Wednesday. “Even if the US labour market deteriorates more than we expect and the Fed falls behind the curve, there is no real threat of a deep recession.”

Stocks soared a day after the big rate cut. Despite wobbling in the hours after the Fed’s rate move, the major indexes hit fresh records in Thursday trades.

“We think the soft landing is still very much in play,” Perkins added. “And while the danger of the Fed falling behind the curve is real, we think the repercussions would be manageable. It is hard to foresee anything worse than a mild recession,” he later wrote.

Some forecasters are still wary of the Fed’s latest policy move due to concerns that cutting interest rates too quickly could ignite a fresh bout of inflation. The market, though, has mostly shrugged off that risk, with one-year forward inflation expectations remaining just above 2% in September, according to Cleveland Fed data.