Monetary Tightening Cycles
If we take a look at movements in the federal funds rate to identify periods of monetary tightening and we ask: When the Fed stops tightening, how can they know if they tightened enough to cause a recession? Surprisingly, the answer is quite simple.
U.S. Monetary Policy Tightening Cycles
In the papers cited below, we identify the ends of 13 monetary tightening cycles in the U.S. economy from 1955 to 2000 (denoted in the graph by vertical grid lines). Nine of the cycles were followed by NBER-dated recessions (shading) and 10 were followed by increases in unemployment (see table). The updated paper shows that a recession has generally followed the end of a tightening cycle if the yield curve spread at that end month is less than 0.78%, which is the optimal statistical discriminant level. Only one case (1966) was incorrectly classified by this rule of thumb, although there was a subsequent rise in unemployment in that case as well. The papers describe the methodology and provide detailed results.
Using essentially the same methodology as in the papers, the end of an additional tightening cycle is identified here as having occurred in September 2006. The yield curve spread was negative in that month and the cycle was again followed by a rise in unemployment and an NBER-dated recession (the "Great Recession"). Another end of cycle is estimated to have occurred in April 2019, although the available monthly data are not yet sufficient to apply the exact method from the 2008 article.
Tobias Adrian and Arturo Estrella, "Monetary Tightening Cycles and the Predictability of Economic Activity." Economics Letters, May 2008
Tobias Adrian and Arturo Estrella, "Monetary Tightening Cycles and the Predictability of Economic Activity." Federal Reserve Bank of New York Staff Report No. 397, October 2009 (Update of journal article)