Fed Gradualism Extends the Tightening Cycle 

September 6, 2018

Source: Federal Reserve Economic Data Source: Federal Reserve Economic Data

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

Tags: FOMC | tightening cycle | Jerome Powell | Wages

< Go to Chart of the Week

The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications