Monday, August 17, 2015

The Fed Is on Thinner Ice Than It Realizes, and It May Be Setting Us Up for Recession

The soft landing already happened, and raising rates could make things worse


Have members of the Federal Reserve already engineered a soft landing?  And are they even asking that question?  The thought came to me while reading Barry Ritholtz's recent piece on policy normalization:  Today, the panic is a receding memory. Interest at zero is an emergency setting. Why do we still have a Fed policy designed for an economy that needed life-support? I believe monetary policymakers generally concur with Ritholtz.

They see zero interest rates as an artifact of the financial crisis. The economy today resembles normality—and so, too, should monetary policy. Hence the push to raise rates this year, possibly as early as the next meeting in September.  Consider instead that zero—or at least, very low—short-term rates reflect the realities of the new normal for economic growth. In this scenario, quantitative easing was the Fed's emergency policy setting. And by ending quantitative easing, the Fed has already normalized policy.

Monetary policymakers will resist this interpretation. They do not believe that tapering and ending the bond-buying program reflects a tightening of policy. Regardless of what they believe, however, real interest rates rose at the suggestion that QE has a short half-life:…..To Read More…..

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