Stay Of Execution: Will The Fed's Rate Pause Breathe More Life Into The U.S. Expansion?

As we head deeper into the year, the U.S. economy continues to grind slowly forward despite trade concerns and Brexit worries. Markets have rebounded from their Christmas Eve lows, and the Fed has signaled that rate hikes are on hold for several months. Does this mean the all-clear has been sounded?

No. Our view is that the U.S. remains late in the economic cycle—and that the economy is still likely to roll over into a recession in 2020. While perhaps a little later than originally anticipated, the risk of an economic slump by the end of next year remains high, in our opinion. Why? Let’s start by taking a look back at the events of last December—a December better left un-remembered, in the minds of most.

2018’s wild December: The catalyst for the Fed’s rate pause

There’s a saying in our industry: economic expansions don’t die of old age, rather they are murdered … usually by the U.S Federal Reserve (the Fed). Late last year, it seemed that this old saying would come true again as the Fed continued to increase interest rates, hiking for the ninth time in three years on Dec. 19. The result of this tightening monetary policy was a flattening U.S. Treasury yield curve, with the yield curve threatening to invert in the immediate future. Yet, at the time, it seemed likely that given the ongoing strength of the U.S. economy, the Fed would continue to raise rates regularly, regardless of any possible inversion.

Then, something happened. Late in the fourth quarter, the strong economic data that powered the market for most of 2018 started to show weakness. This was punctuated by a significant drop in CEO confidence levels1, as companies faced the stark reality that the spectacular earnings growth of 2018 would slow dramatically as tailwinds from the late 2017 tax cuts faded. The market also began to realize that the very strong above-trend GDP (gross domestic product) growth rates of 20182 would face similar declines in 2019 as the effects of the fiscal stimulus package passed by Congress in February 2018 dissipated. The result? Underlying surveys of the economic landscape—such as the Institute for Supply Management’s Manufacturing Index and Purchasing Managers' Index (PMI® )—plummeted, and consumer confidence fell in December.3

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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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