The Federal Reserve raised its benchmark federal funds rate by 75 basis points on September 21, which was not a surprise to most people. It was probably also not a surprise to most that Chairman Powell indicated that the Fed will remain aggressive with future rate hikes, at least for the time being.
What was a surprise was Chairman Powell’s statement that they have not seen inflation come down. Chairman Powell stated, “Our expectation has been we would begin to see inflation come down, largely because of supply side healing. We haven’t.” He went on to say that inflation has not really come down. That is an interesting statement to make given that inflation in the Fed’s preferred measure, the Personal Consumption Expenditures Price Index, has been in decline since February. The rate of decline in the 1/12 in the ensuing five months is steeper than normal and on par with the 1980 and 1989 declines after five months. It is thus a surprise that Chairman Powell stated that inflation “has not really come down,” which leaves the door open for more aggressive rate increases. We have clear disinflation trends with actual deflation occurring in some areas.
It will not be a surprise if we end up with an inverse yield curve, as defined by ITR and as we have shown in prior discussions and in our keynote presentations. Our analysis dictates that we will need to see the inverse yield curve remain in place for two months before we can get an active signal for recession. The median lag time after the two-month signal would put the median timing estimate for the interest-rate-rise-induced recession in 2024.
Business leaders do not need to be surprised by the impact of the Fed’s decisions today and in the months to come. Now is the time to be proactive regarding opportunities in your markets in the rest of 2022 and particularly in 2023. Our rate-of-change and leading indicator tools can provide you with a dependable look into your future, a look that will give you the confidence to move forward while your competitors wonder what all this talk of interest rates really means.