The Elbert Files: Interest Rate Hiccups

Are we headed for a recession?

It’s a natural question when inflation is rising as rapidly as it has in recent months, but not an easy one to answer.

Might as well ask questions about the war in Ukraine: will it spread or settle into a Korean-style stalemate?

Or on gas prices: will they continue to climb or settle into a new normal as they did in the 1970s following the Arab oil embargoes?

Today’s inflation is the product of supply chain issues created by a global pandemic coupled with war in Ukraine, high gas prices and a host of other factors, all of which are twisted into a Gordian knot, like we haven’t seen in sometime.

But does that mean we are headed for recession?

Maybe, but maybe not.

One way to predict future recessions is to look to the past and see what makes sense.

That’s what economist and investment strategist James Paulsen of the Leuthold Group in Minneapolis did in a recent newsletter. Born and educated in Iowa, Paulsen is widely quoted and appears regularly on financial programs on CNBC and Bloomberg TV.

“Right now,” Paulsen wrote in a June 21 newsletter, “equities are in a bear market, but whether this proves to be an end of cycle ‘and lead to a recession’ remains to be seen. or just a “rate hiccup”. .

By “rate hiccups,” he means when interest rates change direction rapidly, usually as a result of action by the Federal Reserve Board of Governors.

Since the 1981-82 recession, the United States has experienced four economic downturns known as recessions, when total economic output has declined for at least two consecutive quarters.

The longest was what we now call the Great Recession, which lasted 18 months from December 2007 to June 2009 and was caused by the collapse of the mortgage industry. The shortest in recent history was the two-month COVID-19 recession two years ago, which lasted from February to April 2020.

The average number of interest rate hiccups between recent recessions has been two, according to Paulsen’s calculations.

So far, only one rate hiccup has occurred since the 2020 recession.

With current interest rates rebounding at or near historic lows, it seems to me there could be room for additional rate hikes before another recession sets in.

Of course, that depends on other factors, including how quickly recent rate hikes slow the economy. Much depends on consumer confidence. If he slams on the brakes, a recession would come sooner than if spending shifted to a lower gear.

Then there’s all the money the federal government pumped into the pipeline during the worrying days of the pandemic. It is targeted for new infrastructure, including rural broadband, and long-awaited upgrades to facilities such as Des Moines International Airport.

Most of this money is just starting to be spent and should continue to support various sectors of the economy, assuming things don’t get too overheated.

And that – too much heat – is what concerns the Federal Reserve today. This is why money magicians raise interest rates. This is what caused the hiccup in our current rate.

Which brings me back to Paulsen and his analysis of rate misfires.

Paulsen uses a chart of 10-year bond yields to show when rates crashed. And while today’s 2% yields are vastly different from the 12% yields of 1984, the economist sees a parallel in the hiccups.

Like today, he writes, inflation was the No. 1 fear in 1984.

At the time, the Federal Reserve was able to adjust interest in a downward slope that produced relatively solid growth for nearly eight years before the next recession hit in 1990.

Is it possible that the latest rate hikes by the Federal Reserve are a hiccup on an upward slope toward further growth, rather than signs of an impending recession?

Only time will tell.

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