Hawks and Doves: The Birds of Summer

August 31, 2022

Two-line chart showing the Federal Funds Rate and Inflation rate since 1970. Chart subtitle: Inflation and rates are up sharply this year; is a recession on the horizon? Chart visual description: Left Y-axis is labeled Fed Funds Rate and ranges from 0% to 20%. Right Y-axis is labeled Inflation and ranges from -4% to +16%. X-axis is set at 0% for left axis and shows years in increments of two, beginning with 1970 and ending with 2022. U.S. Recessions are shaded in light teal in the plot area. Federal Funds Rate line is light blue, and Inflation line, labeled CPI Year-over-Year in the legend, is dark green. Chart data description: Nearly every peak in the fed funds rate precedes a recession. In the mid-1970s and again in the early-1980s, inflation peaked to the highest levels charted, and the closest levels to current day. While the fed funds rate has not yet followed such a sharp increase as back then, the Fed has signaled it will continue to raise rates. Chart source: Federal Reserve Bank of St. Louis. End chart description.

Inflation, interest rates, and a possible recession are top of mind this summer. Last Friday at the widely-watched Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell signaled that the U.S. central bank will keep raising interest rates and leave them elevated in order to fight inflation. With the Fed not backing off its hawkish stance, concerns around what tighter monetary policy means for economic growth remain front and center.

Looking back to the late 1970s — the last time we saw inflation rising near this pace — a series of rate hikes preceded the 1980 recession and the subsequent ’81–’82 recession. The early 1990s saw an 8-month recession stemming from the restrictive monetary policy of the late ‘80s paired with the 1990 oil price shock. Rates were subsequently increased, though to lower highs, before being cut amid the bursting of the Dot-Com Bubble and then again during the Global Financial Crisis. While the Great Recession was officially over by June 2009, rates were kept near zero until 2015. With only modest rate increases through 2018 followed by a reversal in 2019, rates were quickly slashed to near zero again in early 2020 during the shortest recession on record. This year, to address escalating inflation, the Fed has raised rates by 2.25% over a roughly four-month period — the quickest pace in decades. While rate hikes may have started to weigh on demand, inflation remains near 40-year highs, and more needs to be done to restore price stability. The degree of economic slowdown and impact to the employment market as a consequence of rising rates is one of the biggest unknowns and biggest drivers of markets today. While examining history can add context, inflation dynamics are complex and nuanced, and many have never seen these levels of price increases. Overall, uncertainty in markets remains, with all eyes on the Fed, the September FOMC meeting, and the evolving impact on the U.S. consumer.

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