ECONOMISTS and investors are not only worried about when the Federal Reserve will start to push up interest rates. Just as important is the scale and length of the tightening cycle—how much the Fed will need to tighten policy, and how long it will take to do so. There have been 12 American tightening cycles since 1955, and they have lasted just under two years on average. In five of the past seven instances, however, the Fed has relented in a year or less, largely because inflation has been relatively subdued in recent decades.
The inflationary periods of the 1970s and early 1980s saw the biggest increases in interest rates; that helped push the mean increase over the 12 cycles to five percentage points. But the median change may be a better guide to the coming cycle; it stands at just over three percentage points.
Central banks tend to push up rates when the economy is growing rapidly and inflationary pressures are emerging. If they overdo it, the economy may tip into recession. On average, a recession has followed about three years after the Fed’s first hike. Yet that is partly...Continue reading
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