It’s Different This Time! (Where have I heard that before?)

The initial Fed rate cut last week, in combination with several beneficial economic characteristics not enjoyed in the past, should allow a soft landing.

I know, I know, respectable investment strategists should never utter the words “It’s different this time”.   Frequently, both the economy and the financial markets appear different but ultimately turn out to be the same.    Historically, “It’s different this time” has usually proved only a treacherous façade for investors.

But forgive me, I do actually think it may be a little different this time.   At least the environment surrounding the Federal Reserve’s initial easing during this expansion and its corollary bull market.   As many economists and bearish investors correctly point out, past initial Fed rate cuts have sometimes been followed by recessions and bear markets.    The large 50 basis point cut last week by the Fed to begin their easing campaign was met with concerns that perhaps the Fed itself went big because it was worried recession risks were building.   Who knows, if a recession and a bear market do soon occur, it would not be without precedent. 

Nonetheless, I think the environment surrounding the Fed’s contemporary easing cycle is far more supportive for the economy and the stock market than it has been during most past initial Fed interest rate cuts.  What follows is a pictorial comparing several important economic characteristics today with those in the past when the Fed first initiated an easing cycle.

Disinflation has long been assisting the Economy

Chart 1 shows the annual consumer price inflation rate since 1968.   The red dots highlight the first rate cut the Fed implemented before each of the recessions since 1968 excluding the Pandemic recession in 2020.   The 2020 recession is excluded from consideration because it was caused by an extremely rare event unrelated to normal business cycle conditions or economic policies.

In the past, the Fed has usually started an easing campaign when inflation was near its peak for the cycle.  In most cases, when the Fed first began easing, the economy was still being ravished by inflation pressures which often led to a recession despite the best efforts of the Fed.  This certainly was the case during all three inflationary peaks of the 1970s, in the late-1990s, and in 2000.   In the early-1980s, although the inflation rate had decelerated, it was still near 10% when the Fed first eased and as soon as it did the inflation rate spiked higher again.   Similarly, although the inflation rate did peak in 2006 before the Fed first eased, as soon as it did ease in 2007, the inflation rate again surged higher and rose toward 6%. 

Today, the inflation rate has been falling steadily for more than two years, is currently fairly low at only 2.5%, and shows no signs of reacceleration.   While the inflation spike in 2021-22 was destructive for the economy and the stock market, currently, economic players and investors have been benefitting from the helpful power of disinflation.   That is, the Fed is easing today with inflation at its back compared to the past when it commonly initiated an easing campaign with inflation still blowing in its face.