January 31, 2019 / 2:00 PM / 6 months ago

COLUMN-Fed's patience should be a warning to investors: Kemp

(The opinions expressed here are those of the author, a columnist for Reuters.)

* Chartbook: tmsnrt.rs/2TjHXFC

By John Kemp

LONDON, Jan 31 (Reuters) - The Federal Reserve’s promise to be “patient” as it determines how to adjust interest rates in future has been welcomed by investors fearful that an economic slowdown could preface a slide into recession.

The central bank’s statement, issued following the conclusion of a two-day meeting of the interest-rate setting Federal Open Market Committee on Jan. 30, has sparked a limited relief rally in equity markets.

But the committee’s decision to put rate hikes on hold, at least for now, is a bearish rather than bullish sign for the economy and confirms that the risk of recession is elevated.

The committee’s new-found patience is a sign of how much the economic environment has already weakened since the autumn, when it was planning to continue increasing rates in 2019.

In its press statement, the committee noted that a sustained expansion of economic activity is the most likely outcome, but it dropped language from previous meetings suggesting risks to the outlook were balanced.

Actions speak louder than words, and the Fed's decision to go on hold suggests it now senses greater risks to the downside than before, and it is consistent with past interest rate cycles (tmsnrt.rs/2TjHXFC).

Before the onset of each of the last four recessions (1981, 1990, 2001 and 2007), the effective federal funds rate had peaked and was already falling by the time the business cycle turned down.

In fact, the federal funds rate peaked shortly before almost every recession since 1960 (the limited exception was the recession starting in 1980).

Peaking interest rates have often been a harbinger of an imminent recession as the Fed responds to signs that the expansion is running out of momentum.

In every one of those cases, even interest rate reductions were not enough to prevent the economy turning down a few months later.

So while the Fed’s promise to be patient will be welcome in the White House, it is an indication of how much the outlook has already deteriorated, and reinforces the reasons for investors to be cautious.

Related columns:

- Oil prices in 2019? It’s all about the economy (Reuters, Jan. 24)

- Global economy is headed for recession (Reuters, Jan. 16)

- U.S. economy flashes warning signs of impending slowdown (Reuters, Jan. 3)

- Global economy is running out of momentum (Reuters, Oct. 23) (Reporting by John Kemp; Editing by Hugh Lawson)

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