The US Federal Reserve has already given the starting signal for the new interest rate cycle. After achieving the largest rate hike in the last 4 decades in 2022 and having spent two years without touching the price of money, the organization will begin a process of budget cuts in September, as already announced by Jerome Powell, chairman of the central bank. The big question now is: How long will this last and how deep will the rate cut be this time? Although it is true that the situation may change in the coming months and that the Fed will adapt to the variations that may arise in the macroeconomic environment, the scenario that the markets are currently pricing in suggests that the cut will be, in the first instance, year, as aggressive as usual for the Fed, with nothing outside of what has been common in the past. However, if expectations are met, It will be a much shorter process than usual, and in less than 12 months, virtually all the adjustments will have been made. whereas in the history of the Fed, rate cut cycles have normally lasted between 2 and 3 years.
The history of the Federal Reserve’s interest rates begins in the 1920s, but it was not until 1970 that explicit levels began to be established to carry out its monetary policy strategy. In those early years, the inflation crisis that occurred during the decade was attempted to be contained with high rates, up to 20% in 1980. During those years, it is difficult to find a clear trend towards lower or higher rates, since on many occasions they alternated, and in the middle of the process of reductions, the Fed decided at a specific moment to adjust its policy with a rate hike.
So we have to go back to 1984 to see the first clear downward trend in rates in the United States. As the chart shows, the downward cycle in the price of silver that began that year did not last too long. In less than 2 years, the organization went from a rate of 11.75% to about 5.8%, a total decline of 600 basis points.
1989 saw the institution’s second extended rate-cutting cycle, and it was the deepest (but not the steepest) ever in the institution’s history, and one of the longest. In total, it lasted 40 months, between May 1989 and September 1992, with a total rate cut of 675 basis points.
Between 1995 and 1999, the Federal Reserve had a period of a few rate adjustments, with some adjustments, downwards, but also upwards. The rest of that period, however, was a rate cut of 200 basis points over a cycle of more than 4 years, the longest period of decline in the institution’s memory.
The millennium began with the Fed preparing for an aggressive rate cut, which coincided with the US crisis. dotcom. In December, the organization began to lower rates and maintained the cycle of reductions for 30 months, until June 2003, with a process of 550 basis points in total, going from 6.5% to 1% over this period. Subsequently, there were two other cycles of rate cuts: one was the fastest that the institution had ever experienced, during the Great Financial Crisis, with a drop of 500 basis points in just 15 months. The price of silver then went from 5.25% to 0.25%.
The Fed’s last rate-cutting cycle, rather than a prolonged process, was a very rapid adjustment designed to help the economy through the Covid crisis in 2020. In just 8 months, the Fed cut rates by 225 basis points, a moderate adjustment, yes, but it was also limited by the very low level at which the price of silver was at the start of the crisis, just 2.5%. Once the Fed reached 0.25%, it did not cut it any further. It should not be forgotten that the organization also used alternative tools beyond rates, such as debt repurchase programs.
Expectations point to a short and non-aggressive cycle in 2024-2025
After analyzing past rate reduction processes and comparing them with current market expectations for the cycle that is about to begin, everything indicates that the reduction that the institution will carry out in the coming months will be one of the quietest in memory. If analysts’ forecasts come true, rates will be cut by 200 basis points over the next 12 months.. 100 of them would occur in the months remaining before 2025, and another 100 in the first seven months of next year.
From next July, the market only expects a new cut of 25 basis points, which would occur in the first quarter of 2026. The institution’s rate cut will then have ended, leaving them stable at around 3%.
