When Does the Fed Cut With the Dow at or near Record Highs?

That’s been the question I’ve wondered about for the past few weeks. A large portion of the Bullish thesis is based on the Fed cutting — despite the Dow being at 52 week and all time highs.

I asked Mike Panzner to whip up one of his excellent charts on the subject, and here’s what he came up with:

Over the past 35 years, there have been three occasions when the Fed has begun to ease with the Dow near a 52-week high — will we soon see a fourth?

Federal Reserve Rate Cuts When Dow is Near High
click for larger chart


***Date and amount of 1st cut***  ***Date and value of 52-week high***   
  1/16/81   20.000% -> 16.000%            1/6/81   1004.69
   6/5/89    9.750% ->  9.625%              6/2/89   2516.90
   7/6/95    6.000% ->  5.75%                6/22/95   4589.64

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What's been said:

Discussions found on the web:
  1. Dean commented on Oct 11

    I don’t know if I like the idea of the Fed looking at the Dow as a primary factor when making decisions on rate cuts. I think they should be basing their decisions on what the economy is doing and showing some foresight in where it is headed.

    The stats and number that the Fed looks at are all historic and lagging as far as I’m concerned. Most of the Fed folks are in ivory towers, senile or both. I think the people at the Fed need to get out there and do the leg work and see the state of things themselves. After all if they raise rates they are not in danger of getting laid off.


  2. scorpio commented on Oct 11

    can u say “double-top”?

  3. Michael C. commented on Oct 11

    Makes no sense to me. In order for the Fed to cut rates, corporate earnings would have to go to the shitter. Yet, people are bidding up stocks with this expectation of lower rates?

    Seems like people want their cake and to eat it, too. And we all know how that’s a highly rewarding outcome on wall street.

  4. Estragon commented on Oct 11

    In order for the fed to cut rates, inflation has to be clearly tracking back below 2% and expectations have to remain contained. There are a lot of moving parts between that and corporate earnings (and by extention, the level of the dow). Earnings may or may not be in the shitter.

  5. DD commented on Oct 11

    it cant be a double top…and the fed reacts to the economy…the tail doesn’t wag the dog for lack of a better ANALogy….

    btw…im bored…

  6. Kris commented on Oct 11

    I have to agree. Talking about the fed cutting rates, market direction and the economy is getting dull because everyone is arguing about the same things with the usual supporting points. And of course the market seems to want to do whatever it wants irrespective of all these considerations….

  7. Mike_in_Fl commented on Oct 11

    The Fed may eventually cut rates, of course. But the date of that cut is getting “pushed out” … fast … in the Eurodollar futures market. Take June 2007 Eurodollars. Just a few days ago (10/4), they hit an intraday high of 95.15. Today they made an intraday low of 94.79. That’s a big move in a short amount of time (though the total swing is obviously smaller if you use closing prices).

    Moreover, Fed officials have made abundantly clear in recent comments that they have NO plans whatsoever to cut rates in the foreseeable future. Throw in the fact that there is a HUGE amount of hot money betting on higher bond prices and you get the kind of ugly bond market action we’ve had recently. In fact, last Friday’s sell off was the single worst decline (measured in percent) for 10-year Note futures in more than 14 months, according to my Bloomberg data. More details at my blog, if you’re interested:


  8. bondguy commented on Oct 11

    Anyone who listens to the Fed to determine your interest rate call is way off base. Look at the Fed bias during all of 2000–inflation. They went from 11/15/200 worring about inflation to CUTTING rates inter- meeting on 1/3/01. How about the great deflation scare of 2003? That was right about the time rates bottomed. The Fed will not take inflation into account if they need to cut rates because of falling asset prices or weakening economy. CPI, either core or headline always peaks after the Fed has stopped, and in the case of the late 1980’s inflation was rising well after they begain to cut rates. The curve inversion (all treasury rates are below Fed Funds) has always preceeded a rate cut. Of course it could be different this time but in general the bond market does not miss Fed moves, unlike the equity market which frequently gets it wrong.

  9. Mike_in_Fl commented on Oct 11

    bondguy — I know the Fed gets things wrong all the time. And clearly, up until recently, the bond market generally was ignoring Fed comments about the economy and just rallying apace. But in the past week, that’s changed — the bond market actually listened to the comments coming out of Washington. On top of that, “Good” news for bonds (i.e. the weaker-than-expected job growth figures from last Friday) has been sold hard.

    I don’t pretend to know how this is all going to work out in the longer term (Will Bill Gross be right, and we’ll get a few cuts in 2007? Or are we just going to be “stuck in neutral?” with regards to the Fed for a good, long time). But I think it’s definitely worth pointing out that the bond market itself is re-pricing things fast here … and maybe that’s a sign that the “look for immediate cuts” camp has it wrong. Maybe the recent surge in September retail sales, the big Dow ramp, etc., etc. is telling us the economy isn’t heading into the crapper as quickly as the market thinks. Just some food for thought.

  10. whipsaw commented on Oct 11

    well, just suppose that all of this Fed posturing about fighting inflation has been mostly smoke while they are printing money as fast as they can? And providing govt credits to offshore funds to push the markets around as needed and perform the kabuki dance on their behalf? Would that really surprise you?

    In general, I have far more faith in the bond market to get important things right than I do in the stock market. I don’t foresee any rate increases for years and am in the “rate cuts in January” camp simply because I think that it will become apparent by then that the Fed has failed to prop things up by printing money alone. Perhaps that is how the bond guys view things for the most part too?

  11. Financial Methods commented on Oct 12

    The Fed and a Record-High Dow Index

    There have been three times during the last 35 years where the Dow has been at or near record highs (like now) and the Fed has started a rate-cutting campaign. Barry Ritholtz at The Big Picture details the phenomenon in

  12. bondguy commented on Oct 12

    Mike in Fl you make a good point, the bond market is reacting to Fed comments this week, and maybe the rally was overdone-no argument here. I guess my point is that the bond market usually leads the Fed but for some reason much ink is spilled over what the Fed is doing. While the economy could revive after this “soft patch” history says the odds are against that happening. Certainly a soft landing is possible but the current structure of the yield curve argues strongly that the Fed will not raise rates again, when the first cut is , who knows? I view the recent back up as a natural correction in a bull market. Just my opinion, and I have been wrong many, many times before!

  13. jj commented on Oct 12

    Bonds have been selling , reacting to the restatement of Payrolls from last Friday ….. the selling has been from overseas not domestic players , check the bond trades pre- and post- hours

  14. bondguy commented on Oct 12

    Whipsaw I think you are correct(I can’t say I speak for all bond guys!). Given weak employment growth and robust credit growth against appreciating assets(stocks and real estate) our economy has become an asset based economy. Therefore I believe that asset prices need to continue to appreciate to fuel credit growth which is ultimately fueling the economy. Thats where the inflation is during this cycle and why once asset prices start to fall the Fed will start cutting interest rates. However this will not be a suprise as short term rates (T bills and euro dollar futures) will rally ahead of this. In the end I believe that we have a touch of Japan of 1989 in us. Not that the fall out will be as bad but that monetary policy will be unable to revive the economy.

  15. Shrek commented on Oct 12

    There is no doubt that we are an asset based economy. Once prices begin to cool in a substantial manner then the fed will cut. However, credit growth doesn’t seem to be contracting at all. Its still booming. In a finance, asset based economy, loose monetary conditions have to be present in order to support very high debt loads and lots of speculative activities. I think the CPI is a joke. Its really credit expansion that the fed should look at. Its going to be difficult to keep the current system going forever. Another couple years of double digit credit growth is going to be nearly impossible.

  16. Irishandconfused commented on Oct 12

    The Fed keeps printing dollars and American consumers keep consuming is that it? is that their plan? And the value of the dollar isn’t influenced by this printing profligacy? And how will American get their grubby little hands on all this fresh off the press money? A reflated housing bubble (seems unlikely) a stock market bull run? Or are helicopters on standby with bushels of dollars?

  17. Mike_in_Fl commented on Oct 12

    The true test of the bond market’s mettle, in my view, will be the reaction to the upcoming parade of inflation data. September headline figures will clearly tank due to the big decline in oil prices. But will core follow? And if core inflation does decline or moderate its gains, do bonds react positively (as you’d expect) or negatively (this was already priced in … the economy’s going to re-accelerate … the Dow is on fire, etc., etc.).

    Import prices on deck tomorrow … PPI on 10/17 … CPI on 10/18. Time to fasten those seatbelts.

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