Why Fed easing will come too late to stop a serious slowdown in development

The market appears to be partly disappointed by Federal Reserve Chairman Jerome Powell’s comments today as some were hoping for a clearer timeline on when rate hikes could come. Instead, Powell offered no indications that a cut would be on the table at the July 31 meeting and leaned on data beyond that.

Powell said that could change if there’s a real deterioration in the labour market but economists at National Bank highlight the problem with that line of thinking — by the time the labor market starts to deteriorate, it’s too late.

“Are markets – and economists for that matter – expecting too
much out of the first rate cuts? We think so. Looking at the last four cycles of monetary tightening (three of which ended in recession),
we can see that the unemployment rate generally begins to rise several months after the last interest rate hike. The increase even
tends to accelerate after the first rate cuts, as the latter are generally insufficient to return monetary policy to an accommodating
stance.”

The comps aren’t totally valid as the pandemic and credit crisis sparked two of the past four rate-cutting cycles but those also didn’t start from 5.25-5.50% Fed funds. Moreover, policymakers cut quickly while the Fed is much more-likely to take a measured pace this time.