Much like technical analysis is often used to try and define the future in prices economic analysis is used for the same purpose to predict the future.
Citi say that the Fed is running behind on normalising policy and compares today’s events to similar scenarios previously.
They’ve taken the scene from two prior housing crises to compare against the current picture.
They cite that in 1976 the Fed kept rates too low, too long and suffered a major inflation shock. In 1994 inflation remained stable but real yields rose strongly.
In 2014 they say;
“The low in housing (Building permits) was nearly 5 ½ years ago and the rally began in earnest began nearly 3 ½ years ago. The low in Core PCE was posted over 3 ½ years ago at 0.95% (Similar to levels in June 1998 at .95% when the World did not end; similar to levels seen in March 1963 at 1.06% when the World also did not end,”
They go on to summarise that the Fed is “absolutely and equivocally” behind the curve and need to normalise short term rates sooner rather than later.
The issue with using past comparisons for the future is that every situation is different. Among other events, Europe and Japan are playing a bigger part in the global picture in their efforts to kick start their economies. That said, history should at least act as a warning bell for certain events like inflation and this is something that Citi is spot on with. Inflation lags massively and when it builds up in can become an unstoppable machine, and one that CB’s will struggle to cope with.
Half the problem with the Fed (and all central banks) is that it’s unlikely they’ll see a problem until it’s too late. As Adam has noted a hike to 1.0% is unlikely to dent the economy but it might just keep such things like inflation in check. The question is whether the Fed can be that proactive or carry on being reactive.
