Which way forward?
November 10, 2021
The current market and economic cycle has been unique relative to historical standards. Consider the exogenous, health-related demand shock that caused the recession, the unprecedented fiscal and monetary policy responses, and the rapidness of both the decline and the recovery. Since World War II, the average duration of recessions has been over 11 months. The COVID-19 recession lasted just two months. Despite its brevity, the magnitude of the 2020 decline was unprecedented.
A similar trend exists in the job market. This cycle saw a 15% drop in employed individuals in the first two months of the decline, nearly triple the level of job losses in 2007, which had been at the time the most severe decline on record. While we are still 4.2 million jobs below the pre-pandemic peak, continuing the trajectory from the past three months would bring the jobs market back to the previous peak in another 10 months, a similar duration in employment recovery that occurred in 1980 and 1991.
The unusual nature of this cycle is acknowledged by the FOMC’s announcement that they will be patient in keeping the Fed funds rate at near zero despite the recovery in employment. In two previous cycles–the recessions of 1990 and 2007–jobs recovered to their previous highs before the Fed raised rates two times. In all other recoveries, rate hikes occurred an average of eight months before the recovery in jobs.
The Fed’s dual mandate of price stability (managing inflation) and maximum sustainable employment appears heavily weighted toward the latter in the current environment. The recent announcement of asset purchase tapering lessens modestly the expansionary emphasis that favors jobs. However, the Fed remains remarkably accommodative given that the economy has seen an impressive recovery, equity markets sit at or close to record levels, and inflation is at 30-year highs. History will show whether the Fed’s policymaking decisions were correct, but the extraordinary nature of the current cycle makes historical comparisons difficult.
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