In the previous loose period of the Federal Reserve, 1995 left a brilliant legacy. Under Greenspan's leadership, the Fed successfully guided the economy to achieve a soft landing, paving the way for subsequent prosperity.

Now, under Powell's leadership, the Fed has once again initiated a new round of loose policy. Can he replicate the past success and take on the title of 'modern-day Greenspan'?

Considering the fundamental differences in today's economic and interest rate environment compared to the past, if the Fed wants to steer the economy away from a 'hard landing,' they must accelerate their pace.

Why did the Fed start with a strong 50 basis point rate cut? Because the action must be quick.

Looking back to 1995, the era of ultra-low interest rates had not yet begun. The Fed led by Greenspan began tightening in 1994, raising rates from 3% at the beginning of the year to 6% in February 1995. In contrast, this time the Fed's tightening cycle began in early 2022, when rates were in the 0% to 0.25% range and then continued to rise to 5.25% to 5.5% in July 2023.

In other words, this time the rate hike is much larger, and the monetary policy stance is also clearly tighter.

Economist Dario Perkins of TS Lombard wrote in a report released this week that around 1995, Greenspan mentioned that the 'neutral interest rate' at that time was about 75 basis points lower than the Fed's rate level. Therefore, three 25 basis point rate cuts were appropriate for the economic conditions at that time.

However, the current level of neutral interest rates is controversial, but most economists believe that its level is much lower than in the 1990s. This also means that today's economy is more difficult to withstand the heavy pressure of high interest rates than it was thirty years ago, which may be due to various factors such as population structure, differences in productivity growth, and changes in the financial system.

Regarding this, Powell said on Wednesday that he did not know the current level of the neutral interest rate, only that it was 'significantly higher than' the zero or even negative rates before the epidemic.

However, the 'long-term federal funds rate expectations' in the Federal Reserve's economic forecast summary to some extent reflects the expected level of neutral interest rates. The latest forecast shows that this rate has increased from 2.8% in June of this year to 2.9%, which is still far from the policy rate range of 4.75% to 5.0% after this interest rate cut.

This means that after experiencing a period of runaway inflation, the Federal Reserve has maintained a highly restrictive high interest rate level estimated based on its own level. Therefore, there is still a long way to go to restore it to a level that no longer impedes economic development.

This also explains why the Federal Reserve chose to make a significant interest rate cut to start off strong, and why officials expect two more 25 basis point interest rate cuts this year and another 100 basis point cut next year.

Looking back, the Federal Reserve successfully avoided an economic recession back then, and now if Powell wants to replicate that success, considering the starting point of this time, their actions must be faster.

Editor/Rocky