Thursday, January 10, 2019

Do rate cuts cause recessions?

I just read an interesting theory that recessions are caused by rate cuts.  Usually, you would think that a rate cut would help prevent a recession.

it's not the rate hikes that stifle economic growth and send stocks sliding that traditionally telegraph the start of a recession - it's the first rate cut following a tightening cycle that is usually the trigger. Case in point: the last three recessions were all preceded with the Fed cutting, i.e., the Fed loosened policy within three months before the previous three recessions, cutting by 0.25% in 1991, 1.5% in 2001 and 0.5% in 2007. ... the Fed is now too late to save the economy, to wit: "the Fed eases immediately prior to a recession", which is also why the steepening yield curve we are experiencing now is a far more ominous reversal to the recent flattening trend than if the curve had merely continued to flatten.
https://www.zerohedge.com/news/2019-01-10/chart-convinced-albert-edwards-recession-imminent

Maybe the Fed should just keep hiking until the recession starts instead of trying to predict recessions.  (After all, a 2.5% rate isn't that high and by itself won't cause a recession.)  Instead the predictions become self-fulfilled prophecies.

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