Global Central Banks Cut Rates: Fed In A Mid-Cycle Pause

Global Central Banks - Could The Economy Be Mid-Cycle?

Some investors believe the economy couldn’t possibly be mid-cycle because the expansion is already almost the longest since the 1800s. 

Ignore how long you think expansions should be. Technically, the mid-cycle slowdown in 2011-2012 wasn’t close to the middle of the cycle. This expansion has already had 2 mid-cycle slowdowns. 

If this slowdown doesn’t become a recession, it will be the 3rd. That doesn’t mean the expansion will last another 5 years. If the economy recovers in the 2nd half of 2019, there could still a recession in 2020 or 2021. To be clear, the ECRI leading index is now down 4% year over year instead of 4.3%. 

It was down 6.5% in the first week of January, which means the likelihood of an acceleration in growth in the 2nd half of this year has increased.

The chart below reviews the previous mid-cycle Fed pauses. I explained why this could be another mid-cycle slowdown because some investors look at this chart and say it’s impossible for there to be 2 mid-cycle Fed pauses in one expansion. 

As you can see, stocks usually rise after the Fed pauses its rate hikes. It’s no surprise dovishness pushes stocks up. Investors go from thinking a recession is coming, to realizing the expansion has at least a few quarters left.

Many investors don’t even realize that the Fed pausing rate hikes doesn’t mean a recession is coming because mid-cycle pauses are rare; the last one happened in 1995. 

In theory, if the Fed avoids tightening too much, it can have several pauses which extend the expansion. The critical aspect which allows the Fed to pause hikes is low inflation. Since we have low inflation, it doesn’t seem like the Fed needs to hike so much that it causes a recession.

Global Central Banks Hawkishness Didn’t Last Long

It’s no surprise that with the slowdown in developed markets and China, global central banks are easing rates. 

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