When will the next recession be? How about October 20XX. This is not a typo. To get the best prediction of when the next recession will begin, we need to understand how the Federal Reserve is creating volatile booms and why the next downturn may be just around the corner.
A warning must be issued. As physicist Nils Bohr exclaimed, “Forecasts are very difficult, especially when it comes to the future.” However, we can try with experience for one forecast. Consumer prices in the United States rose by 5.7% in 1976, 6.5% in 1977, 7.6% in 1978, 11.3% in 1979 and 13.5% in 1980. As inflation galloped throughout his presidency, President Jimmy Carter appointed Paul Walker as head of the Fed, a former banker and Treasury Department official, in 1979 to halt the long-running price spiral.
Walker succeeded spectacularly. Consumer prices rose 10.3 percent in 1981, revealing how the inflation boost could continue for some time before the Fed’s tight monetary policies killed the inflation dragon.
In 1982, prices rose by 6.1%, 3.2% in 1983 and only 1.9% in 1986, a year before Walker resigned as Fed chairman and was replaced by Alan Greenspan.
To achieve what was then considered incredible due to high inflation expectations, the Walker-led Fed raised the Fed’s interest rates – interest rates on which banks borrow from each other for overnight loans – to 22% by December 1980.
The cost of the tight monetary policies needed to halt the dollar’s decline was a recession: a brief downturn in 1980 and then another, 1981-1982. A long recession can be said to have taken place, which lasted three years, from January 1980 to November 1982.
Determining the time for the next recession
One of the best leading indicators of a cyclical decline is the unemployment rate, which reached a cyclical low in May 1979 (5.6%) a few months before the 1980 recession and did not reach its peak until November 1982 (10). , 8%). Unemployment was falling as the next rise in redundancies began to accelerate in 1990.
Unemployment is currently declining since the peak of the blockade in early 2020 and has reached levels that have historically signaled the beginning of the end of a cyclical boom. The blockages have undoubtedly distorted the unemployment rate, but the historical model reveals that when the unemployment rate approaches three percent and then rises, a recession will soon begin.
The yield curve is one of the most widely followed financial indicators, which predicts a recession, usually within a year. The yield curve reveals the relationship between short-term and long-term interest rates. The yield curve is usually upward, as it is today, when short-term interest rates are below long-term ones, which reflects a significant amount of liquidity in the financial markets.
When the Fed worries that the economy is “overheating”, it tends to raise the Fed’s interest rate to cool price inflation, which occurred before the bursting of both the 2000 dotcom bubble and the housing bubble. since 2007. The yield curve was virtually reversed at the end of 2019, suggesting that the recession will begin sometime in 2020. However, the blockade in response to COVID-19 caused an economic downturn in early 2020 rather than typical cyclical recession.
The economy is now in another cyclical upswing as the Federal Reserve injects $ 4 trillion in liquidity to “simulate” the economy. At the last meeting of the Federal Open Market Committee (FOMC) it was decided to reduce monthly purchases from $ 120 billion to $ 105 billion. In other words, the Fed will continue to keep its foot on the monetary pedal, even when inflation recently exceeded 6% on an annual basis.
In the past, accelerating inflation would have raised concerns in the Fed about raising interest rates to ease inflationary pressures and expectations. Currently, the Fed believes that price inflation is “transitional” and therefore monetary policy should not be tightened.
Therefore, a bold prediction of when the next inflation may begin may be: Inflation is accelerating in 2022. Then public discontent with rising prices and media reports highlighting how prices reduce the purchasing power of the average family may prompt the administration Biden to impose wage and price controls, as President Nixon did in 1971, to curb inflation before his 1972 re-election campaign. prices.
Without price controls, it is very likely that the Fed will raise interest rates on funds sometime in 2022 and continue to tighten in 2023. Thus, the next recession may begin in the fall of 2023, but no later than a year later, if the recession does not start on schedule.
* The material is analytical in nature and is not advice on buying or selling assets on the financial markets.
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