![]() ![]() Predictions of a recession have ebbed and flowed since last summer. “That experiment has failed miserably,” Harris said. The Fed’s pivot in 2019, the last business cycle, was an experiment to allow the economy to run hot. Today is a mini-version of that and recent business cycles are not very informative for what the Fed is doing,” Harris said. “You really have to go back to the 70s and 80s to understand what they’re up to. They were able to do that because inflation was low, he added. In all recent cycles the Fed backed off as soon as there was a whiff of recession,” he said. “The Fed hasn’t deliberately triggered a recession since Volcker. That indicates Market participants don’t appreciate how different this business cycle is from recent business cycles. They haven’t convinced themselves that the Fed is going to accept the recession,” Harris said. It is not just the bond market, the equity market also. “The markets want to believe that the Fed is going to come to the rescue here. ![]() It took Paul Volcker to engineer a recession and hike interest rates to 20% to wring high inflation out of the system.īond and stock-market investors alike have convinced themselves that the Fed will cut rates quickly this year, said Ethan Harris, head of global economic research at Bank of America Securities. Under this approach, inflation drifted up in the 1970s. The Fed would keep policy too easy and then slam on the brakes. The late Marvin Goodfriend, the longtime director of economic research at the Richmond Fed, criticized Fed policy in the 1970s for being “go-stop.” If the Fed doesn’t finish the job, inflation will come back higher and the Fed would have to do even more damage to bring it down, Barkin added. “The number one lesson from the seventies is don’t quit too soon, don’t back off from fighting inflation because you’re worried about what the other consequences might be,” Barkin said in a recent Bloomberg Television interview. On Monday, Richmond Fed President Tom Barkin tied the strategy of holding rates high to research from his regional bank on the lessons of the 1970s. ![]() If the Fed turned around and cut rates like the market is pricing in for 2023, it would create “the worst of all possible worlds,” Brusca added.įed officials have been insisting they plan to keep policy “higher for longer” in this cycle. The only way to get price pressures to cool is if the Fed is willing to keep policy tight, said Robert Brusca, chief economist at FAO Economics. The central lesson from that decade is that recessions don’t lower inflation on their own. The Fed has gone back to the lessons from the 1970s, the last time of high inflation. After all, that was the Fed’s response after the last series of rate hikes in 2018- 2019.īut that’s not the playbook the Fed is following, economists say. Traders in derivative markets have partly walked back rate-cut expectations, but still see the fed-funds rate - now at 5% to 5.25% - falling back to above 4.5% by year-end.īehind this bet is the view that the central bank will pivot and lower rates at the first hint of a recession. ![]()
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