While the long running U.S. economic expansion and equity bull market continue to capture headlines, duration of the current monetary tightening cycle is also approaching record territory. This week’s chart compares the length and scale of the current tightening cycle to the fifteen previous cycles since 1965.[1] Even though the current cycle is enduring well beyond normal length, the cumulative size of rate hikes to-date is less than half the historical average. Patient and gradual best describe the path to normalize monetary policy since the Federal Reserve’s (Fed) lift off from zero in December 2015.
Federal Reserve Chairman Powell’s recent speech at Jackson Hole, “Changing Market Structure and Implications for Monetary Policy,” sheds light on why the Fed has taken such a gradual approach. Powell cites structural changes within the U.S. economy, such as wage stagnation for low- and middle-income workers and declining economic mobility, for the Fed’s more cautious approach today. Powell admits the higher level of uncertainty around key economic variables also leads to a more cautious approach to policy normalization, or in his words, “when unsure of the potency of a medicine, start with a somewhat smaller dose.”
Key Takeaway
Former Fed Chairman Alan Greenspan famously said, “If I’ve made myself too clear, you must have misunderstood me.” In contrast to confusing messaging from previous Fed Chairs, Jerome Powell has been refreshingly honest and clear when sharing his views on monetary policy and the economy. His Jackson Hole speech and last week’s decision to hold press conferences after every Federal Open Market Committee (FOMC) meeting are great signs Powell will achieve his goal in making the Fed and central banks everywhere more transparent and accountable.
[1] Business Insider
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