Lessons from previous “no recession” Fed cuts (1984, 1995, 2024)

Asset price behavior after the first Fed cut depends heavily on if a recession materializes or not. Today, our leading indicators do not foresee a recession, which means the most comparable analogs are the “no recession” Fed cuts in 1984, 1995, and 2024. The takeaway for today is to expect further gains for equities, a rebound in the dollar, and limited downside for bond yields.

In our G3 Leading Indicator Watch, we described the global outlook as one of benign growth and fading inflation with liquidity and policy tailwinds. This is synthesized in our Macro Risk Indicator, which continues to favor equities over bonds (first chart). This favorable outlook is confirmed by relative stock-bond performance ahead of this week's anticipated Fed cut, which aligns with past cycles where easing was not followed by recession, i.e., a "soft landing" (second chart).

Next, we review asset class performances for different types of soft landings. The most comparable “no recession” Fed cuts historically are: 

• 1984 (lingering inflation fears): Inflation had already peaked following Volcker's tightening cycles in the late 70s/early 80s, but there were still lingering inflation fears as headline CPI rose alongside slowing (but non-recessionary) GDP growth. 
• 1995 (disinflationary capex boom): The short easing cycle coincided with surging private investment in technology and decreasing fiscal deficits, fueling a disinflationary growth boom.
• 2024 ("fiscal Sisyphus"): Large fiscal deficits propped up growth ("fiscal Sisyphus") while inflation was falling but remained above target.

Today's backdrop has some elements of all three prior cycles: there are some lingering inflation fears, while AI capex remains large even as the growth rate is slowing. DOGE budget cuts made little dent in the deficit but lower policy uncertainty and planned deregulation could help spur private investment over the next few years. On balance, across all three scenarios, we tend to see a macro set up of supportive monetary policy propping up nominal GDP growth.

As long as a recession is avoided, the S&P 500 has generally continued to rally following the first Fed rate cut. In the '84 cycle, equities initially flatlined due to lingering inflation concerns, but ultimately rallied. Given the uncertainty around tariff pass-through, this could be a path today if inflation surprises to the upside (which is not our base case).

The US dollar also tends to rise following the first rate cut in a soft landing cycle. Today, this outlook is coinciding our FX Edge models and seasonality, all of which point to a dollar rebound from here.

The impact on the 10-year Treasury yield is less clear cut given the inflation outlook. In ‘84, the excessively high level of yields meant they continued to trend lower following the start of that easing cycle. But in ’95 and '24, bond yields were higher 1m and 6m later. Today, while we think inflation risks are well known, our LPPL model just triggered a sell signal for the 5-year bond future, implying yields are biased higher.

Similarly, the response of the 2s10s yield curve has been mixed: after the first cuts in ‘95 and ’24, the yield curve initially flattened, but in all cases was steeper 6 months later. A similar outcome today seems intuitive: short-term yields are anchored to Fed policy, with the market already pricing the policy rate to hit 3% by 4Q26 (see our latest Note on STIR pricing ahead of the Fed). This leaves limited room for front-end yields to fall further, while the long-end has room to rise on upside surprises in nominal GDP growth.

Finally, most prior easing cycles saw the gold price consolidate in the month after the first rate cut. Further out, the performance varies, but we would err towards a continued rise in the gold price given the structural tailwinds like foreign central bank purchases and ongoing concerns about debasement as monetary and fiscal policy becomes more coordinated.