Powell May Not Know It Yet, But The Fed Is Now Trapped

But the real reason why the Fed is now trapped, whether Powell knows it or not, is also the result of the most troubling observation of all: while many analysts will caution that it is the Fed's rate hikes that ultimately catalyze the next recession and the every Fed tightening ends with a financial "event", the truth is that there is one step missing from this analysis, and it may come as a surprise to many that the last three recessions all took place with 3 months of the first rate cut after a hiking cycle!

In other words, one can argue that it was the Fed's official admission of economic weakness - by cutting rates - that triggered the economic contraction that was gathering pace as a result of higher rates and tighter financial conditions. If that is indeed the case, then the next US recession will begin just a few months after the Fed cuts rates.

There is still a tiny chance that Powell will attempt to escape this trap, and instead of cutting rates will resume hiking, but the odds of that happening are tiny: as Bloomberg calculates, if the Fed does resume rate tightening later this year, it will be the first time in the recent history it did so after a drop in stocks this large.

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