June 17, 2024
Ever since the Federal Reserve began its historic rate hiking program in March 2022, there’s been debate on how it will end. Will the landing be hard or soft? At this point, it looks like we’re in for a delayed landing.
The last six months were especially jarring. As of December, inflation was under control, though not yet at the Fed’s 2% target rate. This year we were supposed to see several rate cuts. That was the “soft landing” narrative.
But such endings are rare. After such an aggressive tightening cycle – the Fed raised rates both higher and faster than anything seen since the early 1980s – some said recession was inevitable (i.e., a “hard landing” story).
It’s a well-tested central bank strategy: stop inflation by suppressing demand via making credit more expensive. It’s painful, but effective.
In 11 of 14 Fed hiking cycles since 1950, recession was the outcome. Seeing that pattern and Chairman Jerome Powell’s hawkish intent, recession seemed like a good bet.
Well, it still may pan out. The last few recessions began an average of 26 months after the initial rate hike. We’re nearly there.
While every recession has unique yet well-known triggers, people underestimate their importance. For example, in 2007 it was clear mortgage risk was out of control.
That’s not the problem now. But it’s not the first time there’s been a long lag. That’s why I think recession may be delayed, not derailed.
There were long lags in the 1980s and 1970s before recessions. But we examine the average because it’s the norm – and it’s 26 months from when the Fed starts to tighten to the start of recession.
Prior calls for a slowdown were premature, not allowing for enough lag time. Let’s see what’s happening when data starts flowing from the second and third quarters.