Fed Rate Rise May Presage Recession

I have written before that investors get spooked by the threat of higher interest rates because higher rates on US Government debt means higher discount rates for the future cash flows of stocks and hence lower stock prices. Another reason that investors get spooked by projected higher interest rates is that rate increases by the Federal Reserve have in the past presaged recessions. It’s not a perfect correlation and it may take a couple of years for the recession to hit after the rate increases are commenced, but this chart from the Federal Reserve website shows that rates have gone up prior to recessions:

From the Federal Reserve Economic Data (FRED) Website

Look at the last three times the Fed raised rates:

  • Starting in about 2016 and throughout the latter part of the last decade, ending with the (short-lived) Covid recession, which might have been longer lived had the Fed not bent over backwards to drop rates and to inject $Trillions into the US economy;
  • Starting in 2005 and ending with the “Great Recession” caused by the mortgage-backed bond crisis; and
  • Starting in 2000 and ending with the “Dot Com Bust” recession.

This is not to say that the Fed predicted Covid, or the Great Recession, or the Dot-Com Bust. Rather, I believe these events were the catalysts that plunged an already overheated economy into recession. In all of these instances, the Fed increased rates in an effort to cool economic activity and keep inflation in check, whereafter these bad events occurred and we had a recession.

This Time?

With the previous three times, the inflation threats that the Fed attempted to combat were tame in comparison to what we have now. At 7% annualized, the current inflation rate is a much larger beast to slay. I am dubious that 1/4% increases off of a near-zero current Fed Funds rate will have much of an effect on the inflation rate. There was nothing incremental about what the Fed did to try to help the US economy during Covid, and those relatively drastic actions did help but have also stoked inflation. Now the Fed will attempt to address inflation in an incremental way. Nevertheless, the stock market is spooked.

Statistically Significant

A counter-argument can be made that the data reflected in the FRED chart above is not statistically significant. Recessions are a part of the economy and likely occur despite actions central banks take to combat them. Just because the Fed raised rates and a recession happened a couple of years later doesn’t mean it will in the future. Rate raises are not necessarily causal. There are too many other factors involved with macroeconomics to aver that a rate raise by the Fed will presage a recession.


In the past, it has taken a couple of years from the commencement of rate increases until the onset of a recession. The Fed has not even raised rates yet – all they have done so far is state that they plan to do so, as well as plan to wind down other efforts to prime the pump. Which means that the Fed is still accommodative, which leads to the high inflation rate. Don’t look for a recession in 2022; instead, look for fairly strong growth. If the Fed Funds rate is increased 4 times in 2022, as is predicted, that means it will sit at 1% or maybe 1.25% at the end of 2022, which is not exactly high. The problem is, stock investors will likely continue to have the jitters. If corporate earnings continue to grow as projected, and investors remain jittery at the same time, it could mean there could be bargains to be had as long as the jitters continue.

Be Self-Aware

How do you react when you see other people walking among other people while looking at their cell phone? Do you think that they should either walk or look at their phone but not at the same time? Or do you sympathize because you are guilty of the same behavior? Cell phoning while walking is one thing, but cell phoning while driving is another, more dangerous activity. With cell phones, iPads and the like, it seems that the temptation to multitask is too great to avoid. What’s worse is when people look at their phones with their ear pieces in and walk all at the same time – stay away from such offenders unless you want to get run into!

Courtesy of Google Images

Be Self-Aware

People who multitask as I describe are not bad people but they are guilty of not being self-aware. They do not consider the effect of their actions on others. Try navigating the grocery store aisles when other shoppers are unaware of their context and are thereby creating an obstacle for you. If you are in a grocery store, you should be aware that you are not the only shopper in the store and that there are other shoppers there who may pluck something from the same aisle in which you have chosen to reside. Likewise, please be courteous to other pedestrians by making sure that your actions don’t cause you to be in other people’s way. Also, don’t text and drive!

Financially Self-Aware

What does my point about cell phoners and slow people in the grocery store have to do with your finances and planning? Being self-aware of your current financial condition is an important starting point for making a good plan and sticking to it. The first thing you do when you make your financial plan is to do a personal audit of your current situation, including your job and the industry in which you work as well as your salary and your investment portfolio. The question you need to answer is, “Where am I at, and what do I need to do to get to where I want to be?” Your current age and your health also play an important part. For instance, a single working 40 year old might have a different financial plan and set of goals than will a married and retired couple in their 60’s. Then there is the current asset mix in your portfolio, including in your retirement plan. Perhaps you decided to be 80% in stocks 2 years ago, but now you are 90% in stocks because your stocks have outperformed other assets in your portfolio and now you are 2 years older. If so, perhaps you should reassess your portfolio so that it is commensurate with your current situation.

I say all of this, but you can also go too far with the self awareness. For instance, stocks have been hit so far in 2022 and Treasury bond yields have gone up. If you are too much in tune with your current situation, perhaps this mini-correction in stocks causes you to want to sell and head for safety, if such a place exists. There is a happy medium between being too aware of current market conditions and taking more of a patient approach with your plan. Be aware, but not too much, and if you are on top of the markets on a daily basis, don’t allow the roller coaster market to deter you from executing your financial plan.


The same people who you see multitasking with their phones probably also go to yoga class. One of the important tenets of yoga is being present in the moment and being aware of your body. Perhaps these multi-taskers believe that yoga is their penance for being torn in many ways with the rest of their endeavors. When it comes to your personal finances, my recommendation is that you be more Namaste and less frazzled, unless you want to remain frazzled for many years to come.

Full Rose Bowl

Hello and Happy New Year! Let’s all hope that our nation and the rest of the world continue to make progress against Covid and that fewer people get sick and fewer still die from the awful disease. That said, we are not off to a great start. Anecdotally, it seems like a lot more people are getting sick with Covid over the past 4 weeks or so – more than even a year ago. I don’t trust the official numbers at all because test results taken at home don’t have to be reported, and because asymptomatic people who have Covid may choose not to take a test at all. Fortunately, due to having been vaccinated and also to the potential lower virility of current versions of the virus, the percentage of people getting very sick seems to be lower.

Google Images

Full Rose Bowl

Despite the “tsunami” of new Covid cases, even among the already vaccinated, state and local governments don’t seem to be panicking – yet. Case in point: The Rose Bowl stadium on New Year’s Day was full an rollicking, entertained by the outstanding game between the red hued teams of Ohio State and Utah. To state the obvious, the Rose Bowl is in California, home to some of the most stringent Covid standards during the first 12 or so months of Covid. Remember the days of the Red, Purple, and Orange Tiers? And the complicated mathematics that went behind placement into one of those tiers, which then dictated what activities citizens could or could not do? Despite all of the recent bad Covid news, even California has not yet resurrected its Tier mathematics. Restaurants are not being forced to forego indoor dining, and except for mask wearing, life goes on pretty normally here in the Golden State. Had the old Tier metrics remained in place during this current Covid surge, I can’t imagine that the State would have allowed the Rose Bowl – and the parade, of course – to be held. Perhaps the State health authorities held their collective breath and looked the other way, because there is no “social distancing” in the Rose Bowl, but kudos to them for allowing some normalcy to take place.

California is not alone. So far, there do not seem to be wholesale cancellations and closures throughout the US. While some colleges are going remote for a short time at the beginning of the Winter/Spring term, most primary schools are open for business, although teachers are sick. Private sector companies are perhaps delaying back-to-the-office plans but they are not closing down. Unemployment has not spiked, at least not yet. On the contrary, worker shortages due to Covid or due to other reasons seem to be the larger problem. Mask mandate that have been put in place have often come with end-dates, which of course could be changed, but at least they appear temporary.

Fears Not Realized

Back in late November/early December 2021, when the Omicron variant was new, the stock market sold off, with the S&P 500 down about 5% at that time. The reason given for the sell-off was not concern that people would get sick from Covid, but that governments would overreact and revisit the shutdown policies that they had previously enacted. So far, these fears have not been realized. Governments have so far kept out of the way and have let the current Covid wave play out. The results have been that the health care sector is busy but not overwhelmed, and our economy has been transacting more or less as usual. Investors have liked what they have seen so far: the 5% correction became a buying opportunity, and the S&P 500 Index is back up at a new all-time high.


It’s not pretty if you contract Covid, but these variants seem to play out over a 6 to 8 week period. It seems like governments are realizing this and are not using their biggest weapons just yet. If the 6 to 8 week life holds true to this Omicron variant, and data from other countries suggest that it will, then I believe those big weapons will remain in the arsenal but not deployed. The worst stories with this variant will be about those who got sick or worse, and fortunately not with the economy that was forced to shut down and jobs that were lost as a result.