It May Be Too Late For the Fed to Avoid Recession

May 1, 2019

In a recent Fed meeting, the central bank reiterated its commitment to holding off on rate increases. It also gave no indication that a rate cut was coming, despite weak inflation and calls from economists for a reduction. Even if the Fed were to change its mind, a pivot now may be too late to soften the landing from an economic downturn.

The Economic Cycle Research Institute (ECRI) looked at how the Fed reacted in the last six inflation downturns that have occurred since 1984. They found that if the Fed cut rates in the same month that the U.S. Future Inflation Gauge (USFIG) signaled a downturn, the economy had a soft landing. When a rate cut came after the downturn was signaled, the economy entered a recession. USFIG signaled a downturn last September. Even if the Fed began to cut rates today, it may be too late.

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