The biggest question for 2019 is whether or not the Federal Reserve has raised interest rates too far. During each of the last two cycles, the Fed stopped raising rates shortly before the economy fell into recessions. Will this time be different?
“History does not repeat itself, but it often rhymes.”Mark Twain
Between 1999 and 2000 the Fed raised rates 8 times before tipping the economy into a recession. The Fed paused in July 2000 just two months before the stock market peaked. The ensuing bursting of the Dotcom Bubble resulted in a 47% decline in the US stock market.
Between 2004 and 2006 the Fed raised rates 17 times in an attempt to slow the housing bubble. They paused raising rates in July 2006, 16 months before the stock market peaked in October 2007. The Financial Crisis followed shortly after resulting in a 57% decline in the stock market.
As of today, the Fed has raised rates 9 times and decided to pause after their rate hike in December of last year. Was that one too many? We don’t yet know.
This is not a recent phenomenon. Looking back over a longer period of history shows that every cycle unfold is more or less the same way.
- The Fed lowers interest rates to stimulate the economy
- The economy begins to recover
- As the economy recovers, inflation begins to rise
- The Fed raises rates to control inflation
- Eventually, the economy falls into a recession due to the burden of higher rates
So, did the Fed already go too far?