Fed Patience Tops Our Economic Final Four

Wall Street is watching a litany of telling economic and market signals, but the rest of the country is watching the NCAA men’s and women’s college basketball tournaments.

Since we love talking about both college basketball and economic data, we highlighted our “Final Four” biggest catalysts for the U.S. economy in this week’s Weekly Economic Commentary. The Federal Reserve’s (Fed) cautious approach was the top factor on our list.

The Fed’s patience could be prudent after a prolonged period of monetary tightening. As shown in the LPL Chart of the Day, the Fed has taken breaks from tightening in favor of a wait-and-see approach to interest rates during the two longest economic cycles on record.

Fed Adjustment Periods can Last for Yars Without Recession

“Monetary policy has played a pivotal role in the durability of this expansion,” said LPL Research Chief Investment Strategist John Lynch. “The Fed’s patience is appropriate given the age of the cycle and uncertain global conditions, and history shows a pause has helped extend previous expansions.”

From August 1984 to February 1988, the Fed cut rates almost 6% over three and a half years. Another Fed adjustment period took place from June 1995 through May 1999, when policymakers cut rates as much as 1.25% over almost four years. Both pauses occurred about six years before the next economic recession started. We might not have six years before the next downturn, but history shows the Fed’s policy pauses haven’t led to imminent weakness.

The Fed has also engaged in one of the longest tightening cycles over the past 50 years while unwinding a balance sheet bloated from massive amounts of bond buying. From that perspective alone, a break isn’t surprising.

If you’d like to read more about our Final Fours for the U.S. economy and stock market, check out this week’s Weekly Economic Commentary and Weekly Market Commentary.

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