Oftentimes, the Fed cuts interest rates because it expects economic conditions will worsen drastically in the near future and it wants to preemptively soften the blow, knowing it sometimes can’t prevent a recession altogether.
Excluding the rate cuts that happened during the pandemic, the Fed has had six cutting cycles since 1990. Starting from the point that the Fed began cutting, the economy has fallen into a recession 18 months later on average.
But it’s a wide range: For instance, after the Fed began lowering rates in July 1995, it took 69 months for a recession to occur. However, a recession started immediately when the Fed cut rates in July 1990 and just two months after it cut in January 2001.
On average, for those six cycles, the unemployment rate rose by 1.4 percentage points a year after the Fed cut rates.
the unemployment rate generally rose when inflation cooled. That’s because when consumers are unemployed, they tend to cut back on spending, which means businesses can’t pass along higher prices.
Mish laughs at the Fed prediction of unemployment forecast thru 2025. Up only .2%. Is that forecast needed to predict a soft landing?
It must be remembered that monetary policy works with long and variable lags. This means that today’s interest rate cut will take at least six months to impact the economy.
One reason to think that the Fed had fallen behind the curve in cutting interest rates is that the U.S. economy already has been showing clear signs of slowing.
Job openings have been declining rapidly, employment gains have been moderating meaningfully, and the unemployment rate has increased over the past four months by 0.8 percent to its current level of 4.2 percent. Meanwhile, manufacturing output has been waning, and according to many major companies, consumers are showing signs of fatigue. It seems that the consumers have now run through their Covid check savings.
Sticking to a high interest rate policy also has made little sense when a commercial property crisis has been throwing into question the ability of property developers to roll over the $1.5 trillion in commercial property loans that fall due from now until the end of next year. As office vacancy rates have soared as more work is done from home in the post-Covid world, property price declines of more than 50 percent in major US cities have become commonplace. Meanwhile, the incidence of property loan defaults has been rising.