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 annualized 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.