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Feb 16th 2023
What’s keeping central bankers up at night and likely why higher rates may stick around for a bit? In 1973-1975 we saw a ramp up in inflation, oil prices, higher interest rates, recession, and then lower rates (Chart 1 & 2). As we entered recession in 1975 interest rates moved lower to stimulate the economy (back to pre-inflation levels, Chart 2). By the late 70’s inflation began to ramp up again, and with a spike in oil prices we saw inflation and interest rates move higher than the previous highs in 1975. Central bankers know this playbook and would rather raise rates too much or keep them higher for longer to avoid this resurgence of inflation outcome.
(Similar but not the same. There were many forces that caused the inflation run up in the 1980’s, including a huge demand driven by the baby-boom population entering the workforce and household formation)