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Monetary Policy Moving Forward - What will Powell do? - miko33 - 12-20-2017 01:58 PM
https://www.brookings.edu/opinions/the-challenges-yellen-bequeaths-powell/
Short but interesting opinion piece on the challenges that Powell will have when he succeeds Yellen as the next Fed Chair. Perhaps the most interesting part of the piece is the question of what can we do when the next recession hits - especially if it happens in the not too distant future.
Quote:The next recession. Sometime in his four-year term, Mr. Powell may confront a recession. In past recessions, the Fed has cut interest rates by four or 5 percentage points, but few Fed officials see short-term interest rates rising above 3.25% in the next few years. That would make a four- or five-point rate cut impossible. So if a recession hits, Mr. Powell will have to consider unconventional monetary policies–more bond buying, perhaps even negative interest rates–and that may not be popular inside or outside the Fed.
Mr. Powell has been at the Fed for five years as Ben Bernanke and Janet Yellen successfully steered the economy to a pretty good place. I don’t know what Mr. Trump told Mr. Powell when he gave him the nod, but I can bet what he was thinking: “Don’t screw it up, Jay.” We are all thinking pretty much the same thing.
As mentioned above, we don't have the same amount of room to stimulate the economy via monetary policy if another recession occurs in the next few years - assuming the interest rate increases continue on a slow, measured pace due to the fact that core inflation is still below the 2.0% target. IMHO, a new recession in the near term would have to be dealt with via Fiscal Policy measures instead. That means we would have to go back to the more traditional Keynesian methods of stimulation.
RE: Monetary Policy Moving Forward - What will Powell do? - aTxTIGER - 12-21-2017 11:11 AM
I believe he will stick with Yellen's strategy next year barring an economic shock or a unexpected rise in inflation. He'll continue to wind down the balance sheet and we'll continue 25 basis point rate hikes. The market seems to have priced in 3 hikes next year but I wouldnt be surprised with 4 next year after tax reform.
RE: Monetary Policy Moving Forward - What will Powell do? - tanqtonic - 12-21-2017 03:39 PM
The Fed seems to be jonesing hard to get back to managed small inflation. Quite the change in path they had to take since 2008 to run a money spigots turned on all the way without meaningful inflation issues to counter what could have been a truly devastating deflationary series of events.
RE: Monetary Policy Moving Forward - What will Powell do? - aTxTIGER - 12-22-2017 10:46 AM
(12-21-2017 03:39 PM)tanqtonic Wrote: The Fed seems to be jonesing hard to get back to managed small inflation. Quite the change in path they had to take since 2008 to run a money spigots turned on all the way without meaningful inflation issues to counter what could have been a truly devastating deflationary series of events.
Yup. For me, QE1 and QE2 were hard to swallow but, overall, necessary. The Fed is trying to get back to some sense of normalcy before the next recession so it has some bullets to deal with that situation. The US is better shape with that than Europe. Draghi and the Germans are still dealing with negative rates.
The yield curve is dangerously close to inverting. Once that happens, the next recession is close behind.
Monetary Policy Moving Forward - What will Powell do? - EverRespect - 12-23-2017 08:48 AM
I think you'll see inflation targets raised from 2% to 5%. The big problem is debt (both sovereign and personal), which inflation is a partial solution... combine that with a more protectionist trade approach and it is inevitable. Remember, much of Gen X is still upside down on their property they bought in 2002-2007 even though they are 1/3 - 1/2 through paying it off. "Free trade" has prevented the wage escalation that in previous economies cheapened this debt, particularly in the middle-class. The trick will be to keep control it from getting out of hand so it complements higher growth without becoming the burden it wad in the late 70s.
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RE: Monetary Policy Moving Forward - What will Powell do? - tanqtonic - 12-24-2017 09:34 AM
Wage escalation is being kept in check in the US despite amazingly low unemployment rates because the US has to burn through the godawful participation rate issue.