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Input to a Decision-Making Process

A key reason for ECRI as an input to a decision-making process is evident by reviewing the periods when we diverged from the consensus in real-time.

The closing lines from a Jan. 2022 client report summarized one such divergence:

“The point is that asset prices are at a pinnacle from which a precipitous drop is plausible. We are watching closely to see if the collision of a hawkish Fed and an economic slowdown pushes the economy into a window of vulnerability, as the potential damage that could result from a major correction could amount to a recessionary shock.

This is not to suggest that Fed Chairman Jerome Powell is incapable of pirouetting to a dovish stance if the market experiences a serious drop. But it would be especially difficult to pivot when the Fed – which is way behind the curve – is confronted with inflation staying near multi-decade highs.

In essence, the risk is that Mr. Powell will either 'blink' and give up on rate hikes before a fresh recession threatens, or forge ahead with policy tightening until something ‘breaks,’ resulting in either a stock market crash, or a recession, or both. Either way, as the new year gets underway, the economy is in a particularly perilous position. Specifically, delving into the evolving divergences between the consensus and our cyclical views should help us find a safe path through the competing sets of risks.”

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