This is ominous.
Major run-ups in oil prices when put together with the U.S. Federal Reserve raising interest rates has caused a recession 100 per cent of the time over the last 68 years.
That’s according to compelling research by Josh Steiner, CFA, Sector Head, Financials at Hedgeye Risk Management.
Will history rhyme this time?
That could depend on the length of the Russia and Ukraine war and whether the Fed delivers on market expectations for five or six rate hikes.
In these excerpts from an Early Look report, Steiner details each oil spike since 1945, and the economic result, along with the Fed’s “predictable and recurrent pattern”.
Let’s briefly consider the history.
Beginning with the end of WWII in September 1945, here’s the progression (oil prices referenced are inflation-adjusted to the present):
- Bretton Woods (July 1944)
- 1947–1948 – Oil prices rise sharply ($20 to $30). Recession 1949.
- Apr 1953–Jun 1953 – Oil prices rise modestly, though rapidly. Recession 2H53 – 1H54.
- Jan 1957–Apr 1957 – Oil prices rise modestly, though rapidly. Recession 2H57–1H58.
- Jan 1969–Apr 1969 – Oil prices rise modestly, though rapidly. Recession 1970.
- Bretton Woods Ended (August 1971)
- Jul 1973–Jan 1974 – Oil prices rise sharply ($20 to $60). Recession 1974.
- Jan 1979–Apr 1980 – Oil prices rise sharply ($60 to $135). Recession 1H80 & again 2H81–1H82.
- Jun 1990–Sep 1990 – Oil prices rise sharply ($40 to $80). (Gulf War) Recession 2H90.
- Nov 1998–Nov 2000 – Oil prices rise sharply ($20 to $55). (Dot.com Bust) Recession 2001.
- Jan 2007 – Jun 2008 – Oil prices rise sharply ($80 to $180). (GFC) Recession 2008–1H2009.
- Feb 2016 – Sep 2018 – Oil prices rose steadily ($40 to $80). (Pandemic) Recession Spring 2020.
- Apr 2020 – Mar 2022 – Oil prices rose steadily then sharply ($20 to $110). Recession ???.
Now let’s shift gears and consider the Fed’s role in those same recessionary periods.
As we only have data back to 1954 we’ll consider the last 10 recessions.
Of those 10, guess how many were preceded by an increase in short-term rates? All ten.
Interestingly, the Fed’s policy process has tended to follow a predictable and recurrent pattern for over 70 years.
- Step one: Be too easy.
- Step two: that begets energy inflation, which tends to creep into broader headline inflation.
- Step three: the Fed then begins to tighten its policy and ultimately pricks the energy inflation bubble it created, but, in so doing has 10 for 10 times caused a recession.