It’s not the first time the Fed has fought inflation
Fed has been fighting inflation with its main tool
Steep rate hikes have historically preceded recessions
Fed’s tool to fight inflation is raising the federal funds rate
This is the fastest and most aggressive rate-hike cycle by the Fed since the 1980s
After the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980s
The Fed has hiked rates by 5.25% in the current cycle
This has resulted in short-term rates becoming higher than long-term (yield-cure inversion)
Yield-curve inversion signals 4Q23 US recession
All recessions in the US since 1968 were preceded by an inverted yield curve
As it turns, recession typically follows
Average time from inversion, until the recession started, was about 1 year (so 4Q23)
Warning Sign #2 - Peak employment
US is now at peak employment
Peak employment precedes recession
Unemployment now at 3.8% (same as April 2000)
Puts upward pressure on wages, which is inflationary
On the flip side, a strong labor market can keep the recession at bay
Warning Sign #3 - Slowdown in bank lending
Business lending has slowed; real estate and consumer loans flat
Warns about a slowdown in business activity
Warning Sign #4 - Leading indicators falling & bankruptcies rising
Composite leading indicators falling but seen a slight rebound recently
The indicator looks at factors aimed at providing early signals of turns in the business cycle
While the indicator has given false signals before, recessions have typically followed large falls
72 US bankruptcy filings in 1H23, more than the previous two years
Private and public companies with over US$100m in assets at the time of bankruptcy filing
“Filings in the first seven months of 2023 surpassed total filings for the previous year”
S&P Global Market Intelligence recorded 64 corporate bankruptcy filings in July, the largest monthly total since March and more filings than in any single month in 2021 or 2022
Warning Sign #5 - Weakening consumer
Retail sales have been slowing, which typically precedes a recession
Consumer sentiment has fallen since 2020
Credit card debt at US$1trn and growing while past due bills are rising