Tag Archives: monetary policy

Why did the Fed raise rates? For the opposite of the reason they gave…

Summary: The Fed Governors told us they planned to raise rates, and months ago told us when they would do so. But their explanation of why they raised rates makes little sense. We can see their thinking by looking at the economic projections released at the Open Market Committee meetings. They raised rates not because the economy was accelerating to “take-off” speed, but because it was not.


After a year of waffling and flip-flopping, the Fed finally decided to raise rates, a decision that had the surprise of a sunrise. Yet there is a behind-the-curtain drama of clashing hopes and fears by the Fed’s governors and staff. This conflict does not appear in their statements or press conferences, but in their economic projections. Let’s start with their hope for continued economic growth: the predictions released yesterday for GDP and the fed funds rate.

See my analysis at Wolf Street.

What Will the US Do in a Recession? Look to Japan for Answers…

Summary: In a previous article I listed the powerful tools the US government would deploy during the next recession. Today we discuss something more important: will they work? We can look to Japan for an answer. Their great stagnation began with the 1989 crash, 11 years before the tech bubble burst and began America’s new era. Japan took fiscal and monetary policy to the outer limits. Now it’s in a recession. Although our circumstances differ, we’re following in their tracks.

Keiki Kaifuku, Kono Michi Shika Nai” (“Economic Recovery,
There Is No Road But This”).
— LDP Campaign Slogan, December 2014. If only this were true.

Japan: setting sun

Is that a setting sun, or a rising sun?

As Richard Koo predicted, during the Great Recession America repeated Japan’s mistakes during its “lost decade”. That’s the bad news. The good news is that America climbed into a slow recovery after the worst downturn since the 1930s. The worse news is that another recession lies ahead. Potentially a bad one, with both the world economy and many domestic sectors weak. The government will deploy powerful tools to fight this downturn. How well will they work? Look to Japan for answers…

Read the rest at Wolf Street.

The Fed will use these power tools during the next big recession

Summary: Six years after the recession ended, we are due for another recession. Many experts say that the government is “out of bullets” to fight the next severe downturn. That’s quite false because 2008 marked the start of a new era in which our leaders manage the business cycles using strange and awesome tools. We’ll learn the long-term effects of these tools slowly, probably only decades later.  {2nd of 2 posts today.}

“All is not lost until you run out of airspeed, altitude, and ideas.”
— Pilots’ wisdom.


Roger Bart and Shuler Hensley (on table) in the musical “Young Frankenstein” at the Hilton Theater.

(1) Expect the next recession

Free market economic systems produce greater growth than any other system yet tried. Business cycles — and recessions — are a price we pay for the growth. They’re unpredictable — literally so (the consensus of economists has never predicted one). They can destroy years of growth, and change the course of nations. The 2008 crash did both, as shown by this slide from a typically excellent analysis by Brad DeLong.

See the full post at Wolf Street!

Updating the recession watch; & what might the government do to fight a slowdown?

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago.  {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.



  1. The bad news
  2. Worse news
  3. The weak data
  4. What comes next?
  5. For More Information
  6. Perhaps a better world lies ahead

(1)  The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

20150317 GDPnow forecast

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Let’s ignore another warning from the BIS. Do we enjoy paying for burst bubbles?

Summary: As one market after another drifts off into bubble valuations, a few institutions warn of the consequences. As usual (we’ve done this so many times), we ignore them — our passivity and ignorance earning our role as the deep pockets paying for the resulting damage. This post looks at a few of the warnings from the venerable Bank of International Settlements — the “world’s oldest international financial organization”, the central banks’ central bank.

For more about this see How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.

This is post #3,000, with over 5.5 million page views since opening in Nov 2007.


The BIS gives us yet another warning about the increasing prevalence of asset price bubbles in our financial system: “Asset Bubbles: Re-thinking Policy for the Age of Asset Management“. A excerpt appears at the end of this post, but the message should be obvious to all by now. Earlier analysis by the BIS pointed to the dangers of rising leverage (traditional buying on margin plus and endless array of derivatives) coupled with expansive monetary policy — and (although they can hardly mention this) little regulation of banks).  This report (carefully labeled as not representing BIS views) warns of structural factors encouraging speculative buying (e.g., herding and trend-following by investment managers). After all, it’s not their money.

It’s an enlightening report, typical of the BIS. It carefully avoids more than gentle questions about central banks’ role in this, especially the “put” (price guarantee) they’ve created on prices of financial assets. On the other hand, let’s be grateful for any warnings we get. Although we’ll ignore them, as we did during the housing and tech bubbles. FAILure to learn is an expensive vice.

Previous warnings from the BIS

These are unusually blunt warnings from an institution such as the BIS. Of course they know better than most that nobody is listening because the game must continue while there is money to be made by the financial industry. It’s the public’s role afterwards to politely write checks for the damage.

William R. White (former CIS chief economist)

“I see speculative bubbles like in 2007.” (Interview, 11 April 2014)

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