Recession Scenario : Horror of 1973-75

Assuming that a recession is likely to occur in the near future as a result of policy changes, the important question is what impact it has and how long it lasts. For this, it is important to review the recessions starting from 1950, with three major components: GDP, CPI, and Fed fund rate.

The recessions to review are 1973-75, 1981-82 and 2007-09. Since these were the longest by the duration it becomes of the highest priority to review. The similarities between 1981-82 and 2007-09 are present as GDP and CPI declined quickly and resulted in Fed rates being cut during the period. The outlier is 1973-75, during it GDP fell but CPI rose resulting in Fed rates going higher. 

On a closer look at the 1973-75 recession, the CPI levels increased from 10% to 12% during this period, while GDP fell from 11% to 8%. In technical terms, this was a stagflation period leading to Fed rates first declining from 10.3 to 8.97 to support GDP and then rising to 13 within five months to fight inflation. This volatility resulted in the S&P 500 falling by 48% and the 10-year bond yield rising by 14% during 1973-74.

Though currently, all these levels are far away in absolute terms, the worry about trends in future are similar. Inflation expectations have gone to the highest while confidence is at the lowest. This will not be seen in current data but might have future data risking a similar stagflation pattern. Thus, it becomes important for the government and fed to decide on levels where they can take action to avoid the worst-case scenario.