Monetary policy: No cushion needed, apparently

Posted: March 5, 2014 in economy
Tags: , ,

THE Federal Reserve basically never sees a recession coming (at least when it isn’t busily creating one to whip inflation). In early 2008, when America was already in what would become the deepest of all postwar recessions, the Fed was still projecting quite healthy GDP growth in both 2008 and 2009. This blindspot is not as absurd as it sounds. A Fed that began anticipating a recession that it did not want to occur would essentially be advertising its incompetence (and, one hopes, generating some intense internal discussion over why more wasn’t being done to prevent the foreseen downturn).Nevertheless, recessions occur, with some frequency. At the moment the Fed is projecting quite healthy GDP growth through 2016. But that outlook could change, and it would take the longest postwar expansion on record for America to get through the end of the decade without another downturn.It’s not clear to me that Fed officials are planning ahead. In an interview with Financial Times journalist Robin Harding, San Francisco Fed president John Williams spoke as if America’s most recent macroeconomic convulsion took place in the 1970s:In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.“At that point if we don’t …

via Economic Crisis http://ift.tt/MNev7k

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