In Atlanta today, Fed Chairman Jerome Powell signaled a course correction, citing 2016 as a recent example. “No one knows whether this year will be like 2016,” he said. “But what I do know is that we will be prepared to adjust policy quickly and flexibly … should that be appropriate. … And particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
It’s instructive to recall the evolution of the cyclical economic outlook in the lead-up to the Fed’s year-long pause in 2016.
In July 2015, ECRI declared: “With economic growth set to stay in a cyclical downtrend, hopes for a ‘second-half rebound’ are likely to be dashed.” We went on to say, “The Fed’s rate hike plans are on a collision course with the economic cycle” because, “while the Fed clearly expects a pickup in growth, ECRI’s leading indexes suggest the opposite.”
Fast forward to 2018, and it’s clear that, once again, ECRI leading indexes saw this current situation coming. The Fed obviously didn’t.
In July 2018, ECRI warned of “Worsening Growth Prospects,” noting that “The Fed, being overly optimistic about both structural and cyclical prospects, risks overdoing policy tightening, thereby pushing an already-slowing economy into a recessionary window of vulnerability.”
And in November 2018, we cautioned that “Further rate hikes, in the face of an inflation downturn and a [growth rate cycle] downturn to which the Fed is oblivious, could set off a sharper economic slowdown than it expects to engineer – or worse.” (ECRI’s detailed 2018 track record is here.)
The Fed’s about-face is nothing new. As Yogi Berra said, it’s déjà vu all over again.
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