With the recent yield curve inversion, the markets are again racing toward a U.S. recession forecast.
Back in April, at the annual Minsky Conference, our presentation was titled, Probing Powell’s Patience. ECRI’s argument was that that the Fed, based on this historical record of our U.S. Future Inflation Gauge (USFIG), had missed their chance to preemptively take recession risk off the table.
Revisiting the findings we originally shared in our January 2019 client report, these charts show the past half dozen Fed rate cut cycles in the context of the USFIG. Three of them ended in recessions, two in soft landings. The current episode is still unfolding.
Our research showed that the Fed achieved soft landings – as in 1995-96 – when it started rate cut cycles the same month the inflation downturn signals from the USFIG arrived. However, recessions followed when the rate cut cycles began with lags relative to those downturn signals.
In essence, what really seems to matter is not when the Fed stops rate hikes, but how promptly it starts the rate cut cycle following the inflation downturn signal.
In the current cycle, that inflation downturn signal arrived in September 2018. But the rate cut cycle has only just begun – with a ten-month lag. As we noted many months ago, over the past 35 years such belated rate cuts have always been associated with recession.
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