Insurance cuts: What, when, why Insurance cuts: What, when, why Insurance cuts: What, when, why

Insurance cuts: What, when, why

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  Some useful background on the concept of insurance cut/hike that has recently emerged in FOMC minutes and was pointed out by Chairman Powell.


The Federal Reserve of Dallas has published a very well-written and timely piece on insurance cuts based on the study of the FOMC meeting minutes and the full transcripts in 1994 through 2013 (you can access it here). It gives some useful background on the concept that has recently emerged in June FOMC minutes and was pointed out by Chairman Powell at his press conference on July 31st.

It also includes very nice charts to illustrate the discussion as you can see below.

What?

An insurance rate hike/cut refers to a preemptive action from the central bank when the Fed sees more downside risks (for instance, labor market overheating, slower growth, or risks to growth related to trade war friction like it was the case in past July).

When?

This is not a new concept. Media focused on a series of three consecutive rate cuts in 1998, to face the failure of the hedge fund LTCM and the Asian economic crisis, as a prime example of monetary insurance. In fact, over the past three decades, the Fed has implemented many times insurance moves:

Feb 1995 – insurance rate hike due to fear the economy was overheating, thus leading to excessive inflation

Fall 1998 – insurance rate cut (as mentioned above)

Nov 2002 – insurance cut

June 2003 – insurance cut

Interestingly, on many occasions, insurance cuts/hikes were offset in less than one year. The insurance hike of 1995 was removed within a year, which was also the case for the series of cuts of 1998.

It does not mean that the Fed misjudged the evolution of the economic activity, but it mostly shows that monetary insurance is used for the “fine-tuning” of the economy and can be reversed quite fast if needed.

Why does this matter?

It matters more than ever as many recent researches pointed out the importance of acting decisively (preemptively?) in the context of post QE era and ZNLB (Zero Nominal Lower Bound). This is exactly what officially motivated to Fed to cut rates in past July and probability to cut rates in the upcoming September FOMC meeting again.

Contrary to previous monetary insurance, the recent move was justified by recession of global trade and trade war conflict. This is quite unique that the Fed focuses so much on the global context. It has always taken into consideration this factor, but this is the first time that it plays a dominant role in monetary policy decision.

The evolution of the balance of risks is key regarding the implementation of insurance cut/hike and, contrary to what most commentators highlighted, this is not a new concept in the Fed toolkit.

Where I disagree with Chairman Powell is on where we are in the current business cycle. Initially, he referred to “mid cycle adjustment” when announcing the last insurance cut. However, evidence is compelling we are not mid cycle, not even late cycle but rather at the end of the business cycle. When the Fed sees insurance cuts, I see new monetary easing cycle. In my view, we can at least expect two more rate cuts by the end of the year, in September and in December, and more cuts in 2020 due to the global economic slowdown. At the end of the day, the Fed will have interest rates close to zero.

We are not facing insurance cuts to give a temporary push to the economy. We are entering a new global easing cycle to cope with lower growth than expected and mounting risks. It clearly does not have the same market implications.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.