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Federal Reserve’s policy predicts when next recession will start

Federal Reserve's policy predicts when next recession will start
Paul L.

As the United States economy awaits the next Federal Reserve interest rate decisions, historical data suggests that these policies will likely indicate when the next recession might occur.

Notably, the US economy has faced increased uncertainty regarding a possible recession as major indicators turn red in recent months.

In an analysis shared by Global Markets Investor through an X post on July 7, the correlation between Federal Reserve rate hikes and the onset of recessions is highlighted as worth monitoring.

The platform noted that as the US approaches 12 months since the last Federal Reserve rate hike in July 2023, historical patterns suggest that a recession could be imminent.

The research platform’s insights highlighted the time lag between the final Federal Reserve rate hike and the onset of a recession. According to the data, previous recessions followed the last rate hikes with varying delays: five months in 1960, three months in 1970, two months in 1973 and 1980, one month in 1981, 17 months in 1990, 10 months in 2001, and 18 months in 2008. Currently, it has been 12 months since the most recent hike in July 2023.

Number of months from the last Fed hike to the start of the recession. Source: Federal Reserve Board.

Global Markets Investor’s post emphasized that historically, the US economy tends to enter a recession within 18 months of the last Federal Reserve rate hike. Given that it has been 12 months since the most recent hike, the platform suggested that the US could experience a recession before the end of 2024 or might already be in one.

“If history is any guide, the US economy should fall into a recession before the end of 2024 or is already in,” the platform stated. 

The Fed waiting for a recession? 

Further analysis by the Alpha Oracle in another post on July 8 delved into the behavior of Federal Reserve rates around recessions, supported by data from the Federal Reserve Economic Data (FRED).

This data indicated that recessions often occur when rates are declining. The rationale behind this pattern is that the Fed typically starts cutting rates when it perceives an economic slowdown.

Federal Reserve Economic Data. Source: Federal Reserve

However, the Alpha Oracle noted that the current Federal Reserve seems determined to wait until the economy is nearly in a recession before cutting rates. This strategy reflects a cautious approach, aiming to control inflation while avoiding premature easing that could undermine economic stability.

Overall, several economic indicators support the possibility of an impending recession. Persistent inflation rates have strained consumer purchasing power, slight increases in unemployment rates have been observed, and the housing market is straining, signaling a potential economic slowdown. 

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