“This time” is famously “never different,” but this cycle certainly is.

It’s been a generation since the Fed was forced to engage in a serious effort to combat runaway inflation, and in addition to compelling the most aggressive tightening campaign since Paul Volcker, the persistence of price pressures is seen limiting monetary policy’s capacity to cushion the economy in the event of a downturn.

That’s problematic given what markets and economists generally view as very high odds of a recession. Although it’s obvious that peak rates are near across the developed world (indeed, Canada has already paused), what comes next is up for debate. The resilience of the US labor market complicates things immeasurably. The longer the disconnect between demand for workers and labor supply persists, the longer it’ll take for wage growth to moderate to levels seen as consistent with the Fed’s inflation-fighting efforts.

So, what happens in the event there’s clear evidence of a slowdown, but the Fed remains hamstrung in its capacity to ease aggressively by inflation? Well, as Morgan Stanley’s Seth Carpenter noted, rate cuts to manage any economic deceleration needn’t be a race to the bottom, or even presage an actual easing cycle.

“Even if… the US does fall into recession, we see very little chance of a rate-cutting cycle that takes the funds rate below the Fed’s best guess of neutral,” Carpenter said, noting that in 1991 and 2001, when US job losses were proportional to between 2.25 and 2.5 million in 2023’s larger labor market, the Fed cut rates, but not to the lower-bound, or anywhere close in the former instance. In neither episode was the inflation problem comparable to today’s.

“Given how tight the labor market is and the fact that the economy is currently understaffed, any recession now would likely be milder than either 1990 or 2001,” Carpenter went on, adding that even if the Fed does cut rates, it needn’t mark the onset of a real cycle. Instead, it could just be a “mid-cycle correction,” in policyspeak.

Bottom line: If any credit crunch from last month’s regional banking stress “goes too far,” the Fed might indeed “recalibrate,” as Carpenter put it, but Morgan Stanley doubts the notion that a full-on easing cycle is likely in the US. Or anywhere else, for that matter.

“For the UK, we already expect a mild recession in our base case and, if anything, the BoE could hike further,” Carpenter remarked, adding that in Europe, a mild recession simply wouldn’t prompt “sharp” rate cuts, and even if “a frigid winter and an energy crisis drive a sharp recession, easing would… likely tempered by a fear of unanchoring inflation expectations.”

So, steel yourself, I suppose. Until inflation recedes to target, the vaunted “central bank put” will be struck a long, long way from spot equities.