The Fed's In Deep Doo-Doo If Recession Comes

Takeaway: Tightening credit conditions and economic history don't augur well for the Fed and its "ability to soften the blow."

Editor's Note: Watch out if the U.S. economy stalls ... the Fed has very little monetary policy "cushion" left should the economy take a turn for the worse. That's one of the key takeaways from a recent institutional research report written by our Financials analysts Josh Steiner and Jonathan Casteleyn. On a related note, our Macro team has been highlighting the increasing likelihood that the U.S. slips into a recession sometime in the next one to three quarters. Below is a brief excerpt. To get full research access email sales@hedgeye.com.

 

The Fed's In Deep Doo-Doo If Recession Comes - bear cartoon 01.26.2016

 

Excerpt from Research Report: 

 

"... Perhaps of equal interest is the fact that the Fed has historically had an enormous policy cushion in response to recessions. The table below shows that since 1969, the Fed has eased by an average of 750 bps in response to every recession. The last two cycles have seen the Fed ease by 560 bps and 520 bps. The challenge this time around is that the Fed's current policy cushion is 36 bps.

 

To summarize, credit conditions are tightening, which has historically ushered in a recession, and the Fed is short by around 5 percentage points on its ability to soften the blow."

 

Click to enlarge

The Fed's In Deep Doo-Doo If Recession Comes - policy cushion


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