Fed rate cuts served as a signal the US economy was headed for a recession in 2007. That might not be the case this time around.

• The Federal Reserve cutting interest rates has long been viewed as a harbinger of imminent economic doom.
• Cuts in 2000, 2007, and 2019 were soon followed by recessions.
• But here's why an easing cycle in 2024 might not be the economic warning it once was.

The Federal Reserve sparked a huge rally this week after acknowledging that rate cuts are more likely than rate hikes in 2024 as inflation continues to moderate.

Conventional thinking on Wall Street has been that cuts are a warning that the economy is on the brink of a recession. If the Fed sees a slowdown in the economy, it will lower rates to stimulate demand and consumer spending.

Recent history shows why investors have been conditioned to think this way.

In December 2000, the Fed cut rates for the first time in years, and a recession followed three months later.

In August 2007, the Fed pivoted to cuts after years of hiking rates, and four months later the economy entered its worst contraction since the Great Depression.

And in July 2019, the Fed cut rates for the first time since 2008. A recession began about nine months later, albeit due to the COVID-19 pandemic.

But there is an alternative scenario to what happened in 2000, 2007, and 2019 — and it came in 1995.

Then-Fed Chairman Alan Greenspan launched an easing cycle in the second half of 1995 after tightening policy to tame inflation.

What happened next? The US economy boomed, with the dot-com bubble still five years away from bursting.

"As a result of the monetary tightening initiated in early 1994, inflationary pressures have receded enough to accommodate a modest adjustment in monetary conditions," the Fed said at the time.

That is the exact scenario that could be unfolding right now. If Chairman Jerome Powell cuts rates in 2024, he could simply be fine-tuning the Fed's policy after the most aggressive period of interest rate hikes in its history.

And why not?

Inflation has moderated considerably from the 9% peak it hit in June 2022. Since policymakers know their rate policy has lagging effects, they run the risk of keeping rates too tight for too long, which would eventually throw the economy into a downturn.

Fundstrat's Tom Lee highlighted this dynamic in a video to clients on Wednesday.

"The Fed had to make a dovish move because inflation is falling faster than expected. They need to move away from data dependency and of course away from higher for longer towards managing the business cycle," he said.

If inflation continues to fall and the fed funds rate stays steady, real rates would still move higher. So as inflation heads back towards the Fed's 2% target, central bankers have no choice but to cut rates, Lee explained.

"The Fed expects real rates to be declining as we move forward. That means there could be a lot more cuts on the horizon," he predicted.

The bottom line is that potential interest rate cuts from the Fed in 2024 might not be the harbinger of economic doom as it was in 2000, 2007, and 2019.

Instead, it could represent a small adjustment to the Fed's monetary policy that would help enable continued resilience in the US economy.