17 months have passed since the Federal Reserve’s last interest rate hike to 5.25%.
This timing is significant – it matches exactly the period between the Fed’s final rate hike in July 2006 and the onset of the Great Financial Crisis.
Back then, the Fed raised rates aggressively to 5.25% and 17 months later, the financial system collapsed.
Similarly, over the past few years, the Fed hiked rates just as sharply to 5.25%, but here we are, 17 months later, with no signs of a US economic downturn yet.
The unemployment rate is at 4.1%, a historically low level.
Real GDP growth is 3%, one of the strongest among developed economies.
Also, the stock market is just a few percentage below its all-time highs.
All of these signs are not typical of a recession.
So, has the Fed achieved a “soft landing” today?
Understanding Soft Landings
The term “soft landing” describes a scenario where the Fed raises rates significantly, but manages to cool the economy gently without a recession.
History shows that the Fed has rarely achieved this.
Looking at Federal Reserve data alongside official recession periods from the NBER, most rate hike cycles end with economic downturns.
Effective Federal Funds Rate
Only 3 soft landings have occurred since the 1960s. Today might mark the 4th.
The 17-Month Rule
Academic research suggests that the Fed’s rate hikes typically take 17 months to fully impact the economy. This explains why the financial crisis emerged 17 months after the 2006 rate hikes ended.
When we put the chart of the unemployment rate with Fed funds rates, we see this pattern repeatedly – rate hikes typically lead to rising unemployment about 1.5 years later.
Effective Federal Funds Rate and Unemployment Rate
If we shfit the Fed funds rate forward by 1.5 years on the chart, it shows a close relationship with the unemployment rate.
Throughout 2024, this chart showed elevated recession risks.
While unemployment has risen somewhat as the economy cooled over the last year, the increase hasn’t approached recession territory.
Now, with the Fed cutting rates, the unemployment rate may stabilize or even decline, not indicating a recession.
Effective Federal Funds Rate and Unemployment Rate
At Bravos Research, we’ve had some incredible trades throughout 2024.
For instance, we recently:
- Recently booked 38.81% profit on Bitcoin
- Captured 10.36% gain on TUR
- Secured 16.66% profit on Amazon (AMZN)
Click here to try Bravos Research
Beyond the Fed
While the central bank has significant influence on the economy, domestic banks play a crucial role as well.
They’re the ones actually lending to businesses and individuals.
The Fed loans to domestic banks, who then lend to the broader economy.
This chart shows us the number of domestic banks that are tightening their lending standards to businesses.
Rising standards = Less lending
Elevated levels = Tight credit conditions
Tight credit typically precedes recessions, just like we see in instances like 2001 and 2008.
But, unlike 2008, when banks kept tightening standards after Fed hikes stopped, today’s banks have been loosening standards since Q3 2023.
If we add the unemployment rate on top of the lending chart, it shows a clear pattern:
Tighter standards typically precede rising unemployment by about 1.5 years.
That’s why many expected unemployment to climb in 2024.
But now, as lending standards ease, unemployment could start trending downward again.
A Major Shift in Our Outlook
For the first time in over a year, we’re changing our recession forecast.
Both the central bank and domestic banks have been loosening standards, a combination that historically doesn’t precede recessions.
We no longer expect a recession in 2025, which has massive implications for markets.
In 2024, despite recession risks, we anticipated a higher stock market based on the technical structure.
Now, with a recession less likely, our confidence in the continuation of this bull market is even stronger!
History shows the largest market drawdowns happen during recessions, primarily because earnings contract during these periods.
Looking at S&P 500 earnings since the 1990s: It saw significant contractions during 2001, 2008, and 2020 recessions.
Over the last few years, earnings have risen as the economy avoided a downturn.
Now, without a 2025 recession, earnings could keep climbing, boosting stocks further.
S&P 500 Operating Earnings Per Share
The Inflation Risk
As recession risks fade, inflation risks have risen though.
Rising inflation could push interest rates higher again, which we’ve seen recently with the US 10-year bond yields surging in recent months.
This likely explains recent market volatility.
If rates remain elevated, we might see a choppier bull market than 2024’s smooth advance.
Given these changing conditions, we’re adapting our trading approach at Bravos Research.
We’ve made some incredible trades in 2024:
- Average profit in 2024 = 16.61%
- Average loss in 2024 = 3.52%
We send buy and sell alerts on individual stocks, ETFs, crypto, and commodities.
Get access to real-time Trade Alerts here
Subscribe to our YouTube for more in-depth analysis and Follow us on X for real-time market updates!
