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

• The Fed appears to be following the same path it did in 1995, according to TS Lombard.

• That sets the stage for the economy to avoid a recession like it did in the 1990s, the firm said.

• It’s also great news for stocks, as the S&P 500 has more than doubled in value over that decade.

The Fed is following a 30-year-old playbook with interest rate changes – 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 in the federal funds rate this week. That was exactly what investors were looking for and could set the stage 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 most recent rate cut paralleled what central bankers did in 1995, when Fed officials cut the federal funds rate from a peak of 6 percent to about 4.75 percent over three years . This brought interest rates back to neutral, prevented a recession, and ultimately sparked a new economic boom.

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

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

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

Stocks rose a day after the big rate cut. Despite the wobble in the hours after the Fed’s rate move, the major indexes hit new highs in Thursday’s trading.

“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 amid concerns that cutting interest rates too quickly could trigger another inflation crisis. Still, the market has largely shrugged off that risk, with one-year inflation expectations remaining just above 2 percent in September, according to data from the Cleveland Fed.

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