They say history repeats itself. But when it when it comes to the first interest rate hike since 2006, perhaps it doesn’t.
With the next Federal Open Market Committee meeting on Dec. 16 and the Federal Reserve’s recent minutes showing a hike in December is more likely than ever, Erik Weisman, chief economist at MFS Investment Management, examined whether today’s economy is ready for a rate hiking cycle.
“It’s a really interesting time for [the Fed] to be raising rates,” he said during a media event on Tuesday in New York.
Weisman looked at major economic indicators one month before first Fed rate hikes in the past – December 1986, March 1988, February 1994, June 1999 and June 2004 – compared with today.
First he looked at the nominal gross domestic product growth (GDP) year over year. Today, GDP growth stands at 2.9%, whereas the last several times the Fed raised rates, GDP was around 5% to 7%.
At its lowest, the GDP grew 5% year over year the quarter before the first Fed hike in February 1994. And at its highest, 7.6% year over year in March 1988.
Next, Weisman looked at the year-over-year change in the personal consumption expenditures (PCE) – the Fed’s preferred price metric – a month before previous rate hikes.
Today, the year-over-year PCE has grown 1.3% – compared with 1.9% in 2004, 1.2% in 1999 and 3.8% in 1988.
“That’s lower than almost all of the other times that we’ve raised rates,” Weisman said.
ISM Manufacturing, an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management, is “basically right at the 50-50 mark.”
Whereas, before the most recent rate hikes the ISM Manufacturing index was nearly 55 or higher.