On average, the Federal Reserve stopped its rate-hike cycle 15 months before the last four recessions began, and the date it started cutting the rate occurred six months in advance of the ensuing recession.
Just take the last four decades: In the case of each of the recessions over this period, the economy started contracting several months after the Federal Reserve stopped raising rates and began to cut them. Even though their policy reversals came well advance, the economy nevertheless slipped into a recession.It’s always possible that the Fed might have learned its lesson. But we shouldn’t forget that “this time is different” are the four most dangerous words on Wall Street.
Note carefully that on these dates when the Fed stopped raising rates, it wasn’t necessarily obvious that the rate hike cycle had come to an end. So I next focused on the dates when, following the last rate hike in the cycle, the Fed actually started cutting. On average, this first-cut date occurred six months in advance of the ensuing recession—with the lead times ranging from as short as two months to as long as 13 months. These results are summarized in the accompanying chart.