Historical Post Pandemic Recovery Trends

The Fed’s current target for inflation makes it very difficult to see it hiking in the intermediate-term. That being said, these rules aren’t set in stone. In fact, this is the first hike cycle where the Fed has decided to only hike after the average inflation rate hits its target of 2%. We could easily have a new Fed chair by the time the Fed hikes rates next. Powell’s term as chair expires in February 2022. Biden will probably want a new chair, but we don’t know yet.

The chart below shows the 3-year rolling core PCE inflation rate since 2000 (AIT= average inflation target). There was only one period in which the Fed would have hiked if the rule had been it would only hike when the 3-year rolling core PCE inflation rate rises above 2%. A lot of that period was recessionary. The Fed was actually cutting in the one area it could have raised rates following this new rule.

The rule is set up so that there won’t be hikes. In the last expansion, the 3-year rolling core PCE rate hardly got to 1.8% let alone 2%. It’s quite obvious that the Fed won’t hike rates no matter what this year. However, it will be interesting to see how it reacts to higher inflation in 2022 and 2023; the 3-year average inflation rate will be dragged down by 2020’s low numbers for 3 years. Let’s see if the Fed sticks to its plan in 2022 even if the unemployment rate is low and the economy has fully recovered. Remember, the Fed’s new rule just says the average rate needs to get to 2%. It never gave a specific timeframe. This 3-year metric is only HSBC’s estimate. If the Fed really doesn’t want to hike rates, it can easily make the average 4 or 5 years because it has mentioned having 2% rates for a cycle. A business cycle is typically longer than 3 years.

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