Last January, at Heavy Duty Aftermarket Dialogue in Grapevine, Texas, we discussed how the Federal Open Market Committee (FOMC) would execute the next steps in its efforts to bring down the rate of inflation.
The questions were how, when and why it would pause, and then pivot, from its policy of raising the federal funds rate. Pause-and-pivot is bond market talk for how the FOMC will first stop raising the funds rate (pause) and then start lowering the funds rate (pivot).
The practice of pause-and-pivot was started by Alan Greenspan way back in the 1990s and has been continued by every Fed chair since. This was a major change from the earlier practice, where the FOMC would continue raising interest rates until there was clear evidence the economy had begun to contract.
In all the episodes since Greenspan started the pause-and-pivot strategy, the onset of the business cycle peak has happened somewhere between four and eight months after the FOMC started to lower the funds rate target.
In January, it looked like the rate increases that had taken place over the course of 2022 would continue through their regularly scheduled meetings in March and May. At that point, it seemed likely the committee would have enough information about the level and trend of inflation to begin to consider whether it needed to continue with its course of higher interest rates.
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And then SVB and Signature Bank happened. And, with that, the second front of the war opened: Systemic risk.
