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Slowing economic growth, mild inflation, housing moderation, and a weakening manufacturing sector. You may think I’m talking about today’s economy. I’m not. I’m describing the economic factors prevalent during the 1995-1996 economic slowdown. Why is this an important comparison to today? Faced with these economic conditions the Federal Reserve Board, under the leadership of Chairman Greenspan, reversed course on interest rate policy. After doubling interest rates over the prior year, the Fed reduced rates by 0.75% over the span of 6 months. This led to a rebound in activity and laid the groundwork for the late-90s bull market (and subsequent tech bubble). Could this be 1995 all over again?
Today, downside risks to activity are increasing, while inflation risks remain subdued. This is very similar to conditions during the mid-90s when the Fed lowered rates. Inflation has mainly been the primary concern of central banks. Inflationary pressures could mount as trade tariffs work through the system. However, a stronger U.S. currency has offset part of the increased tariff costs. In fact, the impact on U.S. consumers may be minimal. Without an acceleration in inflation, slowing economic growth should be the primary focus of the current Federal Reserve Board. As such, a Fed Funds rate cut could be just what the doctor ordered.
If the Fed cuts interest rates over the coming months past history suggests this “insurance” cut can stimulate the economy. While the comparison to 1995 may not prove identical, easing interest rate and trade headwinds can improve economic conditions and confidence. It may not lead to strong growth like the late ‘90s but can certainly extend this expansion even further.
Without some stimulus, many of the economic numbers may continue to soften, as seen on our Economic Dashboard. While the data will change, today’s readings do not signify any major revelations about the current slow growth environment. Growth continues, just at a slower pace. In the meantime, stock markets are hitting new all-time highs and gains in the bond market have been surprisingly good. On the surface, slowing growth shouldn’t align with all-time highs. However, there are a lot of other factors involved. Most importantly, if conditions are being set for renewed growth, markets will respond favorably, even in the face of elevated prices.
This is a pivotal time. With growth slowing, today’s decisions carry more weight and could alter the direction of the economy12months from now, whether it be recession or continued growth. If we maintain this course the U.S. could easily be in recession next year. If interest rates and trade headwinds subside, however, then the longest expansion in history can move further into the record books.
In the face of so much uncertainty we remain vigilant and prudent stewards of your capital, understanding the important responsibility you have entrusted in us. More importantly, being a thinking partner as you orchestrate your financial future is of our highest priority. If you have changes in your financial life that we should discuss, please let us know. We will do the same as we see changes to the economic picture.
If you would like to see more data and charts about the economy and various financial markets, please view or download our Monthly Insights book.
Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™
President, Chief Investment Officer, Principal
240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237