ORLANDO, Florida, Aug 4 (Reuters) - With peak interest rates in sight, the countdown is on to when the Federal Reserve and other central banks walk markets down the other side of the hill and start cutting rates.
History shows the average lag between last hike and first cut is short but has gotten longer since the 1990s, something investors should bear in mind as the global easing cycle comes closer into view.
One thing is for sure - the Fed is doing its utmost to dampen market expectations of a quick 'pivot' to prevent looser financial conditions from unraveling its inflation-fighting efforts over the past 18 months.
The drum beat from policymakers finally seems to getting through - if the expected quarter point rate hike in September proves to be the Fed's last, the first rate cut is not fully priced in until May next year.
That would be a lag of eight months, significantly longer than the average gap between last hike and first cut going back decades.
Richard de Chazal, an analyst at research firm William Blair, finds that since 1971, once rates have peaked the Fed has only kept them there for an average of 5.5 months before lowering them again.
"In the past markets have tended to underestimate how high rates are raised and underestimate how low rates are cut. This time, five months would be a bit short, but 9-12 months doesn't seem so exceptional," de Chazal said.
Joe Lavorgna, chief U.S. economist at SMBC Nikko Securities, noted that the average lag between last hike and first cut over 18 cycles going back to the 1950s is even shorter, at three months.
But the last five cycle average is more than double that at 7.6 months.
Similarly, a historical sweep of 11 Bank of England policy pivots going back 50 years shows the average lag is six months, according to Reuters calculations. Over the four cycles since the BoE gained independence in 1997, however, it has lengthened to 8.75 months.
LONG, LONG, LONG
To mangle Milton Friedman's famous reference to the link between monetary policy changes and economic conditions, the lags are getting longer, if not necessarily more variable.
There are several explanations for this.
Inflation was high and volatile in the 1970s and early 1980s, forcing central banks into rapid policy reversals. Macroeconomic volatility then fell steadily and significantly during the 'Great Moderation' from the mid-1980s to the Great Financial Crisis in 2007.
Better and faster access to information means policymakers can now make more informed decisions. Central bankers should - in theory - be more proactive than reactive, and be able to set policy for the slightly longer term.
Inflation targeting, more sophisticated financial markets, transparent central bank communications, and greater central bank autonomy since the 1990s have all contributed as well.
Global easing, meanwhile, looks to be tentatively underway. Brazil's central bank, one of the first to raise rates in early 2021, has started cutting them after a 12-month pause. Its last hiatus in 2015-16 before easing was 15 months.
Both lags are significantly longer than anything seen since the Real Plan was launched in the mid-1990s.
The Reserve Bank of Australia has paused for two policy meetings but does not seem anywhere near pivoting. Current market pricing suggests that will not come until 2025, which would be an even longer lag.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Reporting by Jamie McGeever; Editing by Richard Chang)
