This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession

Back on June 17, Bank of America started its 66-day countdown to the moment it was convinced the Fed would hike rates, September 17, 2015. We, correctly, said that “we disagree entirely” with BofA’s conclusion that the Fed would hike rates, and sure enough, it did not after the Chinese August devaluation unleashed the ETFlash crash, the EM debt rout, a surge in the VIX and a correction in the S&P500, which crushed the Fed’s carefully laid rate-hike plans.

But while we disagreed with BofA’s countdown timing, we agreed with something its strategist Michael Hartnett said, namely that “gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets.”

BofA then laid out several key factors why “this time is indeed different” when evaluating the global economy’s receptiveness to a rate hike:

Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan

Central banks have cut interest rates more than 600 times since Lehman, a rate cut once every three 3 trading days

Central bank financial repression created over $6 trillion of negatively-yielding global government bonds

45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)

US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP

US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters

The US equity bull market is now in the 3rd longest ever

83% of global equity markets are currently supported by zero rate policies

However, to the Fed none of these matter: only the price action of the S&P500 does, which as everyone knows, is trading just shy of its all time highs so “all must be well.”

Which is why Janet Yellen and the Fed are now intent to hike rates, steamrolling over the Fed’s “data dependency” and committing the latest error, this time of communication, with the rate hike coming at a time of non-existent headline CPI inflation, of GDP which in Q4 will be 1.4% according to the Atlanta Fed, and when the US manufacturing sector officially entered into contraction for the first time since the crisis. The reason for this is the following statement from her just delivered speech laying out “The Economic Outlook and Monetary Policy”: