# VI. Rate Cycle: Holds, Premature Adjustments, Exits and Divergence

Given the long and variable lags for monetary policy to affect the economy, a perennial challenge for central banks is evaluating when to stop raising rates during a tightening phase, or when to stop cutting rates (or end quantitative easing) during an easing phase.<sup>65</sup> Similarly, even if central banks are not actively adjusting monetary policy, assessing when to begin tightening or easing can be challenging when the economic outlook is uncertain and/or the existing restrictiveness of monetary policy is difficult to assess (e.g., when the neutral interest rate is uncertain). Can we learn anything from historical rate cycles about when to stop adjusting rates and when to transition between tightening and easing phases? And do the shocks behind rate cycles and/or the extent of global synchronization of rate cycles affect an economy’s ability to successfully exit a phase?

In an effort to address these questions, this section brings together various pieces of analysis developed throughout this paper to examine the historical experience with “exits”, i.e., the end of tightening and easing phases. It begins by evaluating the characteristics and incidence of “holding periods” (when policy rates are unchanged and all QE programs have ended), and then “premature adjustments” (when an attempt to shift out of a phase is then reversed). The section ends by examining the historical experience of exiting from Highly Synchronized Tightening periods. This includes a closer look at the evolution of activity and inflation after the 1979 tightening phase, the only historical period that shares some key characteristics with today: a synchronized global tightening with a large supply-shock component; substantial divergence in when economies transitioned to easing phases, and several major economies transitioned to easing before the United States.

# VI.1. Holding Periods

To begin, we utilize the dates denoting the start of easing and tightening phases defined in Section II for our sample of 24 economies from January 1970 to May 2024. We will refer to these turning points as successful exits from a phase and calculate two statistics to study the “holding periods” before a successful exit:

- Hold Duration: the number of months when policy is “on hold” at the end of a phase, defined as (i) after the last increase in the policy rate during a tightening phase, or (ii) after the last decrease in the policy rate and after any QE program has ended (defined in Section II) during an easing phase.<sup>66</sup>

- Hold Share of Phase: the number of months that policy is “on hold” (defined above) relative to the total duration of the relevant tightening or easing phase.

Chart 18 shows the resulting medians for easing and tightening phases for each of the five subperiods used throughout this paper (and defined in Section III) through May 2024.<sup>67</sup> The graphs show several noteworthy patterns. At the end of tightening phases, policy interest rates are generally on hold for several months—ranging from a median of 3 months during 1985-1998 to 8 months from 2008-19—with the length gradually increasing over time to almost 10 months during

> 65 For evidence on the lags, see Friedman (1961), Christiano et al. (1999) and Aruoba and Drechsel (2024). 66 We continue to define a “change” in the policy interest rate as greater than or equal to 0.1 percentage point. We also consider policy “on hold” even if the central bank is continuing QT as these programs are considered “in the background” and not the active tool of monetary policy for our sample.

> 67 We focus on medians instead of means as several extreme observations affect the means; for example, Switzerland was on “hold” for 88 months from 2015-2022, during which it did not lower rates or use QE.

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