Personally, I, Roger, love when people look at pictures and draw parallels to predict the future, without looking at the deeper causes. A picture may tell a thousand words, but they can easily tell the 1000 wrong words. We will only know in hindsight who was right, but below is a post from LinkedIn that caught my eye. I have shortened it a bit for readability, but my key takeaway, as before, is to be careful with pictures and graphs. They are very useful and often easy to understand. And in that lies a risk as well.
“It is déjà vu. On August 7, 2007 with an inverted yield curve for 19 months and a cratering stock market, the FOMC decided to stay the course and keep the Fed Funds rate at 5.25%. A brutal recession officially started a few months later.
The most consequential piece of information for Fed decisions is the jobs report. Yes, inflation is also important but inflation is easier to observe in real time. The FOMC statement is July 31, 2024. On August 2, 2024, we got the jobs report.
Why couldn’t the Fed have pushed their meeting forward by two days so they could develop policy based on the most current data? The economy does unfold according the Fed’s schedule. The Fed needs to be flexible. As a result of this rigidity, we need to wait a month for action. An emergency meeting might fan the flames and create additional uncertainty.
Indeed, we have seen this movie before.
The minutes from the FOMC meeting of August 7, 2007 state:
“Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.” They held the Fed Funds rate at 5.25%. Sound familiar?
At the time of the meeting, the yield curve (difference between 10-year and 3-month yields) had been inverted 19 months. The stock market was down 7.7% from its peak on July 19, 2007.
By the September 18, 2007 meeting, the Fed cut rates by 50bp. It was too late. They followed with additional cuts in October and December of 2007. The NBER dated the business cycle peak (recession beginning) as December 2007.”
Sources: Campbell Harvey, Apple Tree Capital Partners
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