Wall Street rallied on Thursday as sentiments boosted about a "soft landing" for the US economy after the Federal Reserve’s 50 basis point rate cut.
The Dow Jones closed 522 points higher, the S&P 500 gained 1.7%, both hit new record highs.
Tech stocks led the charge, with Nvidia and AMD spiking 4% and 5.8%, while Meta and Alphabet climbed 3.9% and 1.5%.
Sectors tied to economic growth, like financials and industrials, also benefited.
JPMorgan Chase rose 1.4%, while Caterpillar and Home Depot gained 5.2% and 1.7%, respectively.
Earlier this year we talked about the parallels between the current environment and the late 90s boom.
A technology revolution was underway in the late 90s, with the rapid adoption of the internet. Productivity was high. Growth was hot. Inflation was low. And the Fed juiced it with rate cuts, starting in 1995.
The economy went on to average 4.5% quarterly annualised growth through the end of the 90s. And stocks did this ...
Also like the current environment, the Fed had real rates (Fed Funds rate minus inflation) at historically high levels heading into the first cut.
Greenspan cut a quarter point in July of 95, again in December, and then January. Despite more rate tinkering throughout the period the real rate remained relatively high, as you can see in the chart below.
And as you can see in the far right of the chart, the real rate prior to yesterday's 50 basis point cut was in the zone of that late 90s boom (i.e. at historically high levels).
The question: After yesterday's move, could the Fed hold real rates here and still get a 90s-type boom-time economy, this time driven by the technology revolution of generative AI?
Growth solves a lot of problems. But the U.S. debt/gdp has doubled since the late 90s. And while the debt service/gbp is comparable to the late 90s period at the moment, it won't be as they continue to refinance at high nominal rates.
This debt service situation argues that the Powell Fed will have to make deeper cuts than Greenspan did in the mid-90s.