Let’s assume that the economy is finally slowing down.
If it took the Fed two years to slow the economy down, then once the Fed starts cutting rates, it will take two years for the economy to reaccelerate. As a result, cutting rates in September will not be enough to prevent a recession.
In other words, with the consensus expecting a soft landing, the key question in markets today is why the transmission mechanism of monetary policy should be asymmetric when the Fed is cutting rates versus raising rates.
If the long and variable lags are symmetric, it should take two years before the economy accelerates from when the Fed starts cutting in September 2024.
The consensus sees a 30% probability of a recession within the next 12 months, see chart below. The consensus likely thinks that the lagged effects of Fed hikes will eventually slow down the economy.
To be sure, we do not expect a recession, see also here. But this is what the Fed’s symmetric logic about long and variable lags would imply.
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