Investment Institute
Viewpoint Chief Economist

Revisiting the 1994 miracle


  • Beyond the additional hikes in the US, UK, and Euro area this week, we don’t expect a change of tone from the central banks.
  • We take a hard look at the likelihood to see a replication of the “recession free” tightening of 1994. We are not optimistic.

A “central bank super week” is starting. The Fed, the ECB and the Bank of England all meet. Last week the Bank of Canada chose to buck the trend – or precede it for the optimists– by announcing a pause after its 25bps hike, although disinflation in Canada is still tentative, and it’s going to be tempting for the market to read into the decision in Ottawa the harbinger for the long-awaited “dovish pivot” elsewhere. We don’t think the time has come though. True, we expect a downshift to 25 basis points by the Fed this week, but their communication remains consistent with considering to pause only in Q2 – at best. The ECB for its part could not be further away from the BoC thinking at the moment. We expect the ECB to hike by more than the Fed not only this week, but also in March, which would solidify the recent rebound in the euro exchange rate. The Bank of England is – again – in a delicate position. A still tight labour market combined with still higher-than-expected core inflation call for a 50bps hike – out central scenario – but the Marginal Propensity to Consume (MPC) is clearly concerned by the risk of “overdoing it”.

So far, the real economy has remained resilient despite the relentless rate hikes, to the point that the equity market may be counting on the replication of the “1994 miracle”, the only episode of Fed tightening since the early 1960s which did not trigger even a shallow contraction in US GDP. Beyond the fact that the size of the cumulative tightening is already larger than in 1994, we note that it now applies to a more leveraged economy than then. In addition, in 1994, the Fed responded to “imaginary inflation”: corporates did not have to deal with margin contraction and households’ purchasing power was not eroded. Finally, supply-side conditions were much more favourable then. In the first half of the 1990s, the civilian workforce was expanding much faster than today, while “animal spirits” were probably spurred by the emergence of globalization, materialised very concretely in the US by NAFTA. Current resilience is welcome, of course, but we continue to dispute its longevity, especially with central banks “not being done”.

Revisiting the 1994 miracle
Download the full article (587.02 KB)

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top