The United States is on track to set a national record this summer for the length of an economic expansion. How long it may continue after that is anyone’s guess. Nearly a dozen countries in recent history have experienced expansions that have lasted 15 years or more; so it is conceivable that U.S. growth could continue for several more years.
So what will end this expansion? Economic booms don’t die of old age; the Fed has to kill them. While humorous, there’s a kernel of truth in that old joke. Federal Reserve Board (Fed) actions can muzzle economic growth and make an economy more susceptible to adverse events that the economy would otherwise weather without a downturn. However, at least three times in the not-too-distant past, the Fed has successfully cooled off red-hot economic growth while avoiding recession, creating soft landings amid long-running economic expansions. Here’s what happened:
- 1964 to 1966: The economy was buzzing along, hitting peak real gross domestic product (GDP) growth of just over 10%. The Fed boosted the federal funds rate from 3.4% to 5.8%. Real GDP growth fell to nearly 0%, but the expansion roared on for three more years.
- 1983 to 1984: The GDP growth rate peaked at more than 9%, and the Fed raised the federal funds rate from 8.5% to 11.6%. GDP growth fell to just over 3%, but the expansion continued for nearly six more years.
- 1994 to 1995: The economy’s growth rate hit a high of around 5.5%, and the Fed ratcheted up the federal funds rate from 3.0% to 6.1%. GDP growth fell to just over 1%, but the expansion continued until the stock market’s tech bubble burst in 2001. This 10-year boom is America’s longest running expansion to date.
Fed policymakers are clearly trying to manage a soft landing in the midst of the current long-running boom. Beginning in December 2015, the Fed instituted a series of nine rate hikes, including four in 2018, but have put further rate increases on hold following the latest one in December 2018. In doing so, the Fed has responded to a fourth-quarter bear market in U.S. stocks, data signals of slower global economic growth, the strength of the U.S. dollar (which is a de facto monetary tightening) and erratic (but still expansionary) fiscal policy.
The Fed has probably not completed its rate increase cycle. However, moderate and stable core inflation has provided the Fed some leeway to temporarily err on the side of monetary ease. So it appears that the Fed’s caution has provided it an opportunity to negotiate yet another soft landing for the economy