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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Feb 01 2019

Silence of the Hawks

The Fed’s about-face last month came as no surprise to ECRI. In fact, we had been pointing out that the Fed was on a collision course with the economic cycle for months, telling Bloomberg in October that the expected rate hike path in 2019 was “not going to happen.”


Last summer we had told ECRI clients that “inflation may surprise to the downside” (USCO Focus, August 2018), before confirming a month later that “inflation is entering a downtrend” (USCO Essentials, September 2018), on the basis of ECRI’s U.S. Future Inflation Gauge (USFIG). Today, it is evident that year-over-year CPI inflation has turned down, falling to a 17-month low in its latest reading. With the USFIG remaining in a cyclical downturn, this inflation cycle downturn is set to persist.

As for economic growth, last spring we noted “weakening growth prospects” (USCO Essentials, April 2018) that kept “fading” (USCO Essentials, June 2018). Since then, growth in ECRI’s U.S. Coincident Index – a composite index of output, employment, income and sales – has also turned down.

Once again, the Fed has been on a collision course with the cycle, as in 2015, when the USFIG and our leading indexes of economic growth were in downturns – signaling weakening inflation and a slowing economy. In July 2015, ECRI had declared: “The Fed’s rate hike plans are on a collision course with the economic cycle” because, “while the Fed clearly expects a pickup in growth, ECRI’s leading indexes suggest the opposite.”

Please recall that back then the Fed pushed through one rate hike in December 2015, but had to pause an entire year before hiking again in December 2016, once the economic cycle outlook became more favorable.

Today, with both the economic and inflation cycle heading down, the Fed has had to walk back its planned hikes this year, and the silence from the hawks is deafening. In fact, if ECRI’s leading indexes of inflation and economic growth continue to worsen, the Fed’s next move may actually be a cut.

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