October 15, 2018

Don’t Let the Fed Scare Us Into A Recession

“A recent article in The Hill described how, despite current excellent growth rates, a growing number of economists believe the U.S could enter a recession in 2020. As the article points out, such forecasts are very uncertain, but because it takes about a year for monetary policy to take effect, an emerging sentiment among some economists is that the Fed will screw up policy in the year ahead.

Why would economists think such a thing? Because the Fed has essentially announced an intention to do just that. Chairman Jerome Powell, a normally savvy financial observer (and former colleague of the author) stated on Oct. 3 interest rates “are a long way from neutral,” and “We may go past neutral.”

Risky plans for large interest rate increases seem driven by adherence to a failed economic theory, the Phillips Curve, that postulates changes in the unemployment rate determine inflation. In fact, there is no consistent Phillips relationship; what’s more, inflation is quiescent and has been turning down, the economy is expected to slow next year, and the financial markets, which have been more accurate than the Fed, are telling us rates are practically at neutral now.”

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