The problem with this approach is that it ignored information from the long-term bond market, and long-term bonds were signaling that there was no fear
The Fed also seemed overly concerned about having its powder dry for the next downturn, whenever that might be. This meant that the Fed was pushing short- term rates higher, so if an unexpected recession hit, the Fed could lower rates. The desire to have some ammunition to deal with future tough times meant that the Fed was unusually willing to risk causing an economic deceleration just so it could help the economy recover after it happened. Part of this focus on rates and fear of not having any dry powder for the next recession may stem in part from the realization that the quantitative easing (QE) programs from 2010 onward, after the economy was clearly in recovery mode, did absolutely nothing to stimulate growth or QE can support equity and bond prices (lower yields) and reduce market volatility, but the balance sheet expansion cannot bump up real GDP growth in an already expanding economy. We do note, importantly, that for a recession caused by an over expansion of to buy distressed assets and serve as a lender of last resort can help contain the economic damage and promote an economic recovery. The Fed did this 2008 hit the markets, in stark contrast to the Fed’s lack of action in the 1930s.
THE FED ALSO SEEMED OVERLY CONCERNED ABOUT HAVING ITS POWDER DRY FOR THE NEXT DOWNTURN, WHENEVER THAT MIGHT BE.
and Half Decades despite unemployment cycles, rate cycles, zero rates, QE, stock market booms and busts, growth and recession. 3%
2%
1%
0%
Chart created by CME Group Economics Team. Data Source: St. Louis Federal Reserve Bank FRED Database (PCEPILFE).
TARIFFS There is no doubt that both the U.S. and China are feeling more pain than whether they stay or go in a new deal. For China, a key item will be whether why agree to a deal without the US showing the willingness to rescind the And then there are currency considerations. The U.S. has reversed its on foreign exchange markets, and now the U.S. wants China to manage its currency to avoid depreciation. If economic fundamentals were to pressure the Chinese yuan to depreciate versus the U.S. dollar, then the Chinese would need to sell some of their massive holdings of U.S. Treasury securities to buy yuan and prop up their currency. That is, if the trade deal talks were to falter, the Chinese yuan would be vulnerable, while a trade agreement could lead to managed stability.
27 | ADMISI - The Ghost In The Machine | March/April 2019
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