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Test the hypothesis that recessions usually start 6 to 18 months after the fist rate cut by the Federal reserve after a period of extended tightening of interest rates. If true provide a timing model to predict the next recession after the September 2024 rate cut. Provide a train of though to the process.
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·10
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Forbes
Federal Funds Rate History 1990 to 2025 - Forbes
Federal Reserve Bank of St. Louis
A Look at Fed Tightening Episodes since the 1980s: Part I
CNN
We finally got a rate cut. Here's what history says will ...
TRADING ECONOMICS
United States Fed Funds Interest Rate - Trading Economics
Based on historical analysis of Federal Reserve rate cuts following tightening cycles, the hypothesis that recessions typically begin 6–18 months after the first rate cut is not consistently supported by the data. Instead, recessions have historically started much sooner—within 0 to 7 months—after the initial rate reduction. Below is a detailed analysis and a timing model for the next recession following the September 2024 rate cut.
Testing the HypothesisHistorical data from four major tightening episodes since the 1980s reveals a clear pattern:
- July 1990 rate cut: Recession began immediately (0-month gap) 3.
- January 2001 rate cut: Recession started within 2 months (March 2001) 3.
- September 2007 rate cut: Recession began after 3 months (December 2007) 3.
- July 2019 rate cut: Recession started after 7 months (February 2020, pandemic-influenced) 3.
Key findings:
- The average delay between the first rate cut and recession onset is 3 months, with a range of 0–7 months.
- None of the analyzed episodes aligned with the 6–18 month window; instead, recessions consistently began earlier 3.
This contradicts the hypothesis, as recessions typically follow initial rate cuts much faster than proposed. Factors like economic shocks (e.g., pandemics) or policy effectiveness may explain outliers like the 7-month gap in 2019–2020 3.
Timing Model for the Next RecessionUsing the observed historical range (0–7 months), the model predicts the next recession will likely occur between September 2024 and April 2025, based on the Fed’s first rate cut on September 18, 2024 5.
Prediction window:
Start DateEnd Date<tbody]| september="" 18,="" 2024<="" td=""] | april="" 18,="" 2025<="" td=""] |
Methodology:
- Input: First rate cut date (September 18, 2024) 5.
- Parameters: Minimum (0 months) and maximum (7 months) observed delays from historical data.
- Calculation:
- Earliest start: September 18, 2024 + 0 months = September 2024.
- Latest start: September 18, 2024 + 7 months = April 2025.
Caveats and Limitations- Small sample size: Only four tightening episodes were analyzed, and the 2019–2020 period was disrupted by the COVID-19 pandemic 3.
- External factors: Geopolitical events, inflation volatility, or unforeseen crises (e.g., pandemics) could alter timelines 3 4.
- Current context: The Fed’s September 2024 cut was a "supersized" 50-basis-point reduction, reflecting proactive risk management amid economic uncertainty 3 5. This may shorten the typical lag if the economy is already fragile.
ConclusionHistorical evidence refutes the 6–18 month hypothesis, showing recessions often start within 0–7 months of the first post-tightening rate cut. Applying this pattern to the September 2024 cut suggests heightened recession risk between September 2024 and April 2025. However, variability in economic conditions and policy responses necessitates cautious interpretation. For real-time accuracy, monitor leading indicators like unemployment spikes or yield-curve inversions 2 3.
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Does the 0 to 7 month window align with historical recession patterns after rate cuts
Does the 0 to 7 month window align with historical recession patterns after rate cuts
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Sources
·10
Steps
CNN
We finally got a rate cut. Here's what history says will happen next
Investopedia
U.S. Recessions Throughout History: Causes and Effects
Forbes
Federal Funds Rate History 1990 to 2025 - Forbes
Can U.S. Avoid a Recession This Time?
Can U.S. Avoid a Recession This Time?
The 0 to 7 month window between the first Federal Reserve rate cut and the start of a recession does align with some, but not all, historical recession patterns.
Supporting Evidence for a Short Window:
- In July 1990, a recession began immediately after the Fed cut rates 1 2.
- In January 2001, a recession started just two months after the initial rate cut 1 2.
- In December 2007, the Great Recession began three months after the first rate cut in September 2007 3 2.
These cases support the idea that recessions can and have started within 0 to 7 months after the first rate cut, especially in the post-1990 era.
Contrasting Evidence for Longer Lags:
- Broader historical analysis shows that, on average, recessions have started around 18 months after the Fed begins cutting rates, with considerable variation 1 4.
- Some cycles, especially when excluding exogenous shocks like the COVID-19 pandemic, have seen lags of 9 to 18 months after the last rate hike, not necessarily the first rate cut 4.
Summary Table:
Cycle StartFirst Rate CutRecession StartLag (months)<tbody]| 1990<="" td=""] | july="" 1990<="" td=""] | july="" 1990<="" td=""] | 0<="" td=""] | | 2001<="" td=""] | jan="" 2001<="" td=""] | mar="" 2001<="" td=""] | 2<="" td=""] | | 2007<="" td=""] | sep="" 2007<="" td=""] | dec="" 2007<="" td=""] | 3<="" td=""] | | other="" cycles<="" td=""] | varies<="" td=""] | varies<="" td=""] | up="" to="" 18<="" td=""] |
Conclusion:
- The 0 to 7 month window is consistent with several recent cycles, particularly in the last three recessions, where the lag was very short 1 3 2.
- However, across all post-1990 cycles, the average lag is closer to 18 months, and lags of up to 18 months are not uncommon 1 4.
- The short window (0–7 months) is a valid model for predicting recessions after the first rate cut in certain modern contexts, but it does not universally describe all historical patterns.
Key Point:
While the 0–7 month window matches the timing of several recent recessions, historical averages and other cycles suggest that longer lags are also possible. The window is a useful but not definitive rule of thumb 1 4 3 2.
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What economic indicators predict a recession within the first year after rate cuts
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What economic indicators predict a recession within the first year after rate cuts
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FocusEconomics
The Top Economic Signs and Indicators of a Recession
J.P. Morgan Private Bank U.S.
Five factors we use to track recession risk, and what they say now
td.com
Recession: Indicators and How to Prepare - TD Bank
Bankrate
Economists' Survey: Recession Odds Have Now Risen To 36%
Key Economic Indicators Predicting a Recession Within the First Year After Rate CutsSeveral economic indicators have historically provided reliable signals that a recession may occur within a year following Federal Reserve rate cuts. The most consistently predictive indicators include:
Yield Curve Inversion
- The inversion of the yield curve—when short-term Treasury yields exceed long-term yields—has preceded every U.S. recession since the 1970s, typically leading by 6 to 24 months. The most closely watched measures are the 10-year vs. 2-year and 10-year vs. 3-month Treasury spreads. A sustained inversion is a strong red flag for recession risk 1 2 3 5 7.
Rising Unemployment Rate (Sahm Rule)
- The Sahm Recession Indicator signals a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more relative to its low over the previous 12 months. This indicator is particularly effective at identifying the onset of recession in real time 1 3 5.
Leading Economic Index (LEI)
- The Conference Board’s Leading Economic Index (LEI) aggregates ten key economic components. A recession signal is triggered when the six-month growth rate of the LEI falls below -4.1% and the diffusion index (measuring the breadth of component declines) drops below 50. This “3Ds rule” (duration, depth, diffusion) has historically provided early warnings of imminent recessions 6.
Corporate Profit Margins
- Deteriorating corporate profit margins often precede recessions, as declining profitability typically leads to reduced business investment and layoffs 2 5.
Other Notable Indicators
- Stock market declines (20% or more from peak)
- Widening credit spreads (difference between yields on corporate and government bonds)
- Decrease in real GDP growth
- Drop in business and housing investment
- Increase in initial jobless claims 3 5.
Summary Table of Key Indicators
IndicatorPredictive SignalTypical Lead Time<tbody]| yield="" curve="" inversion<="" td=""] | short-term="" rates="" >="" long-term="" rates<="" td=""] | 6–24="" months<="" td=""] | | sahm="" rule="" (unemployment)<="" td=""] | 3-mo="" avg="" unemployment="" up="" 0.5%="" from="" 12-mo="" low<="" td=""] | near="" real-time<="" td=""] | | lei="" (3ds="" rule)<="" td=""] | lei="" growth="" <="" -4.1%,="" diffusion="" 50<="" td=""] | several="" months<="" td=""] | | corporate="" profits<="" td=""] | sustained="" margin="" declines<="" td=""] | months="" to="" a="" year<="" td=""] | | stock="" market<="" td=""] | 20%+="" decline="" from="" peak<="" td=""] | variable<="" td=""] | | credit="" spreads<="" td=""] | significant="" widening<="" td=""] | months<="" td=""] |
ConclusionThe most reliable predictors of a recession within a year after Fed rate cuts are an inverted yield curve, a sustained rise in unemployment (Sahm Rule), and a significant decline in the Leading Economic Index. These indicators, especially when multiple signals align, have a strong historical track record for forecasting recessions in the subsequent 12 months 1 2 3 5 6 7.
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