ECONOMIC CYCLE RESEARCH INSTITUTE
NEWS & EVENTS
Fed Risks Policy Mistake
CNBC | Dec 18, 2021
 

It’s clear that after Thanksgiving – having insisted for far too long that the rise in inflation was “transitory” – the Fed finally realized its mistake. It’s way behind the curve on inflation, which turned up over a year ago, and is scrambling to catch up while trying to put a positive spin on it.

On Friday, New York Fed President John Williams said that that the economy next year looks “very good,” and that raising interest rates would be a positive sign “in terms of where we are in the economic cycle.”
 
The Economic Cycle Research Institute has a very different view. Economic growth has been slowing since last spring, and that cyclical slowdown is not over. If we’re right, the Fed risks making a policy mistake – tapering and tightening into the teeth of a sustained cyclical slowdown.

Mr. Williams also talked up the “really strong improvements in the labor market.” While it’s true that the jobless rate can fall fast when millions leave the labor force and don’t come back, year-over-year nonfarm payroll jobs growth has now declined for seven straight months, and growth in real personal income excluding transfer payments has fallen for six straight months.

In light of these cyclical patterns, we were on CNBC’s Trading Nation a month ago, warning that consumer spending was going to be weaker than expected. Sure enough, this past week the soft November retail sales data was released, followed by Wall Street reports that retail sales have been weakening further in December.

Many will say that economic growth is still pretty good. But that’s precisely what changes in a sustained cyclical slowdown. If economic growth keeps slowing month after month – and that is our forecast – it won’t stay very good. That’s the essence of a cyclical slowdown. Unfortunately, our analysis of the forward-looking data doesn’t show a sustained recovery ahead.

The bond market seems to have come around to our view of cyclical risk, and the yield curve has kept flattening.

Our expectation is that either Fed Chair Powell – who’s becoming famous for his sudden “pivots” – pivots yet again to become much more dovish next year. Or he keeps going and something breaks, resulting in serious recession risk.

Review ECRI's current real-time track record.

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