Intermeeting cuts? History says not even close: BofA

In a note to clients Tuesday, Bank of America analysts argued that the likelihood of the Federal Reserve implementing intermeeting rate cuts is extremely low based on historical precedent.

According to the bank's analysis, there have been only nine emergency rate cuts since 1987, and these were all triggered by severe economic or financial market conditions.

BofA states, "Intermeeting cuts are truly emergency-based actions," highlighting that such measures were taken in response to global pandemics like COVID-19, the bursting of asset price bubbles such as the tech bubble and the 1987 crash, systemic financial events like the Global Financial Crisis (GFC), the Long-Term Capital Management (LTCM) crisis, the Russian financial crisis, and acts of war such as the 9/11 attacks.

The analysts note that these cuts occurred amidst "appreciable downside risks to growth," citing language from past Federal Open Market Committee (FOMC) statements which referenced conditions such as "unsettled conditions in financial markets," "disrupted economic activity in many countries," and "weakening of the economic outlook and increasing downside risks to growth."

Furthermore, BofA points out that emergency cuts often followed the failure of large, systemically important financial institutions, including LTCM, Fannie Mae, Freddie Mac, and Lehman Brothers.

Significant equity market declines also played a role, with past cuts following drops of around 30% during the 1987 crash, 40% during the tech bubble burst, 33% during COVID-19, and 55% during the GFC.

The current market conditions do not meet these criteria, according to BofA analysts.

They conclude: "Our point is simply to say that history suggests the bar for intermeeting cuts is extremely high and that conditions on the ground today do not warrant such action."

They acknowledge that future developments could change this assessment but BofA maintains that, for now, history states, "no, not even close."