DEEP DIVE: The Fed - Tightening Or Merely Normalizing?

Based on November’s employment report released on Friday, we can safely conclude that there is still no sign of an impending recession. The Godot recession is still a no-show. Our soft-landing (a.k.a. rolling recession) scenario remains intact, as it has since early last year. The diehard hard landers are still expecting a recession, as they have been since the Fed started to tighten in early 2022. But they now expect it in 2024 and mostly think that it will be a shallow recession.

The widely anticipated recession scenario has been based on a very simple and logical premise: The Fed started raising interest rates aggressively last year during May. Short-term and long-term rates have increased by at least 500bps through the summer (Fig. 1 below). That shocking pivot, following a very long period of ultra-easy monetary policy, must be a terrible shock for the economy, the thinking goes. While the “long and variable lags in monetary policy” have turned out to be longer and more variable this time, a recession will surely occur in 2024, the hard landers figure.

Additionally, the hard landers point out: The yield curve has been inverted since the summer of 2022 (Fig. 2 below).