DB CoTD: 15 in 70 years....

According to futures pricing, today will mark the start of a Fed hiking cycle that is expected to deliver 95bps of tightening over the next 12 months. As we mentioned on Monday, this would be only the fourth hiking cycle this century and the 15th since the mid-1950s.

Today’s Table of the Day looks at the timing and scale of each cycle. It is worth noting that before the early 1980s, the Fed steered short-term rates through reserve management (and targeting monetary aggregates under Paul Volcker) rather than by explicitly targeting the Fed Funds rate as it does today. Nevertheless, short-term rates still moved in line with Fed policy.

Looking back at these hiking cycles, they have lasted 22 months on average (15 months median) and delivered an average of 478bps of tightening (313bps median). One recurring feature of Fed tightening cycles is that their eventual magnitude is rarely apparent at lift-off. A 2011 New York Fed study using the Blue Chip Financial Forecasts survey found that markets had consistently underpredicted the scale of hiking cycles since the survey began in the early 1980s. Since then, 2015 may have been a rare exception, with markets pricing a slightly higher terminal rate than was ultimately reached. By contrast, in 2022 the market once again significantly underestimated the extent of tightening. The shallowest hiking cycle on record remains the 1986–87 episode, which saw just 137bps of hikes across four moves.

If measured from the first rate hike, a recession has historically followed around 3 to 3.5 years later, on average. However, the range is wide, from only 11 months between the 1980 hiking cycle and the 1981 recession, to 86 months between the 1983 cycle and the next recession in 1990. Indeed, the March 2022 hiking cycle began 54 months ago and a recession still hasn’t happened.

So, if markets and our economists are correct (see their FOMC preview here), this would become the shallowest hiking cycle in modern history. However, few would have expected previous hiking cycles to prove as aggressive as they ultimately became when they started. See Monday’s CoTD here for what happened to Treasury yields during past Fed hiking cycles.