Mar 3, 2017

When the Fed screws up, recessions follow

The Federal Reserve will decide in two weeks whether to raise interest rates for the second time in three months. Improving economic data like rising wages and inflation, and a soaring stock market, have prompted markets to assume they will do so.

Higher rates are a good sign at this stage of the recovery — they show that markets expect better economic conditions in the future. But this part of the business cycle also comes with risks, given the fact that as of this week we are in the midst of the third-longest economic expansion in modern history, after the booms between 1991 and 2001 and 1961 and 1969.

Good things must come to an end: Fed Chair Janet Yellen says that economic expansions "don't die of old age," rather, they have specific triggers, like central bank error or the build up of economic imbalances in the system. But every fiscal quarter is another roll of the dice — eventually it will come up snake eyes. The largest risk to the economy right now is the Federal Reserve's plan to raise rates over the next several years, as many recessions in the past have occurred after the Fed tightened policy in an attempt to rein in inflation.

Data: Federal Reserve Bank of St. Louis, Board of Governors of the Federal Reserve System; Chart: Andrew Witherspoon / Axios
  • Early 80s: These two recessions were triggered by Fed Chair Paul Volcker's extreme interest-rate increases aimed at taming one of the worst bouts of inflation in modern American history.
  • Early 90s: Fed funds rates were also rising in the months leading up to the recession; but one can also argue the culprit was the runup in oil prices that resulted from the Gulf War, sapping spending power and consumer confidence.
  • Early aughts: The Federal Reserve began raising rates as the dot com bubble expanded during the late nineties, and raised rates steadily from the winter of 1999 through the fall of 2000 in an attempt to cool an overheating economy. By March 2001, the economy was in recession.
  • The Great Recession: The housing bubble was certainly a culprit of the 2008-2009 recession, but many blame the Federal Reserve as well. Bush Administration monetary economist Scott Sumner thinks the Fed should have moved much more quickly to lower interest rates in the months leading up to the recession, and could have possibly avoided the recession altogether if they had.

Rising interest rates are just one cause of recessions, but they are particularly potent because they act as break on all sectors simultaneously. By the summer of 2018, we'll be in the longest expansion ever. If Donald Trump can make it even one term without presiding over a downturn, it will be an unprecedented event.

Go deeper

A decline in business lending shows the impact of manufacturing's struggles

Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

U.S. commercial and industrial lending fell by $9 billion in December, the largest drop in nearly three years, and the total amount of C&I loans declined to levels last seen in May, data from the St. Louis Fed shows.

Why it matters: The decline in lending to commercial and industrial businesses is the latest sign that the recession in U.S. manufacturing and continued struggles in goods-producing sectors of the economy are spreading. The Commerce Department reported that U.S. business investment had contracted for six straight months as of the third quarter, and had the biggest drop since the end of 2015 in Q3.

Go deeper: Manufacturing should bounce back in 2020

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Powell and the risk-off bull market

Jerome Powell. Photo: Alex Wong/Getty Images

The Fed’s 180-degree turn was the story of 2019, asset managers and market analysts say.

What happened: Chairman Jerome Powell and the U.S. central bank went from raising interest rates for a fourth time at the close of 2018 and giving market watchers the explicit expectation this would continue in 2019, to doing the opposite. The Fed cut rates thrice and even began re-padding its balance sheet in the last quarter of the year, bringing it back above $4 trillion.

Go deeperArrowJan 2, 2020

Wages for typical workers are rising at their fastest rate in a decade

Construction workers holding a rally in the Bronx. Photo: Erik McGregor/LightRocket via Getty Images

Wages for nonsupervisory employees — who make up 82% of the workforce — are rising at the fastest rate in more than a decade, the Wall Street Journal reports.

Why it matters: It indicates that the benefits of a tightening labor market and a time of historically low unemployment rates are finally being passed along to most workers.

Go deeperArrowDec 27, 2019