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Economic Cycle and The Fed

While the latest jobs report showed a sharp slowdown in year-over-year (yoy) jobs growth to a 27-month low, it was already at a 21-month low the prior month, so the jobs slowdown itsn't exactly new news. In cyclical terms nothing much has changed. The cyclical downturn in job growth is part of cyclical downturn in overall economic growth that began a year and a half ago.

Back in March, on this show, I made the point that while a recession was not imminent, neither was an upturn in growth. Rather, the cyclical slowing would continue. Today we find that yoy growth in ECRI’s coincident index is at a 28-month low.

Because of the growth rate cycle slowdown, we warned last summer that the Fed’s rate hike plans were on a collision course with the economic cycle. After their December rate hike, major Wall Street houses were expecting four or five additional rate hikes in 2016, but ECRI was very clear that a full-blown rate-hike cycle was a nonstarter.

This attempt at a rate hike cycle has been exceptionally ill-timed, starting a full year inside of a cycle slowdown – the longest lag we have ever seen between the start of a growth rate cycle downturn and the beginning of a Fed rate hike cycle. Now – no matter what – we would have seen the longest lag ever between the first and second Fed rate hikes.

The Fed is struggling because it does not seem to realize that its plans are still on a collision course with the economic cycle. Unless a growth rate cycle upturn begins to take shape, its next move may well end up being a rate cut.


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