Will the business cycle end or extend? Here's what you should know

Is the Fed seeing the picture correctly?

What picture is current economic data painting?

The traditional account of the business cycle is very familiar. An expanding economy eventually runs short of the resources needed to supply demand, prices rise, central banks hike rates to curtail inflation, and the economy slows. Then, inflationary pressures ease, central banks cut rates, demand grows, and the cycle starts afresh. To interpret the future of the economic expansion, let’s take a look at the current data picture.


The Federal Reserve has been tightening rates since December 2015.


Since the end of 2018, global growth has continued to slow.


Unemployment has remained low, while wages have continued to rise.


Inflation has remained contained near the Fed’s 2% target.

Interpretation may vary...

Lens 1: Ends The traditional business cycle plays out

Through this lens, it would be easy to conclude that the business cycle is entering a late stage based on economic data mentioned above. Bond markets seem to concur that a slowdown is upon us, already pricing in that the Fed will cut rates next.

Lens 2: Extends This time around is different

Yes, the Fed has been hiking rates, but only to normalize policy toward ‘neutral’ levels. With little inflationary pressure, the Fed has little reason to clamp down on demand. Through this lens, it might be months or years before the economy runs short of resources, requiring the Fed (or other central banks) to hike further.

Has the Fed already tightened too much?

Bond markets seem to be saying the Fed has raised short-term rates too much, although equity markets are buoyant. We think that the flat yield curve has more to do with a changing view of longer-term inflation than expectations of an economic slowdown, but we’ll look at the following indicators for confirmation of this view in the months ahead.

Credit conditions

Financial conditions are now at their loosest since 1994, according to the Chicago Fed’s index. We will watch to see if future data echoes this message.


We will closely monitor company outlook statements, as well as the usual data indicators, for signs that growth is recovering.

Labor market

After one weak US payroll report this year, we will be watching for signs that the overall pace of job creation is slowing.

Or is the Fed making a mistake by pausing?

While we expect incoming data to confirm that the Fed has not gone too far in hiking rates, we also need to be cognizant that keeping rates on hold increases medium-term risks. We will be watching:


If higher labor costs are feeding into prices, the Fed could ‘fall behind the curve’ in inflation, leading to additional rate hikes.

Corporate leverage

The recent decline in borrowing costs is likely to encourage further growth in corporate debt levels.

Base case and investment positioning

In our base case, we think inflation will rise at only a modest pace, allowing for a continuation of the steady-growth, low-rate backdrop we have experienced over the past few years. But with higher valuations curtailing future investment returns, and the possibility of volatility as the market frets about Fed policy errors, US–China trade, and other market risks, we keep a more balanced exposure to risky assets, and use hedges where appropriate. See Our preferences for our full list of tactical recommendations.

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