The Fed’s Tail-Chasing Problem
The Federal Reserve’s current policy reasoning could push rates sharply lower in response to remote risks
By Justin Lahart
An ounce of prevention is worth a pound of cure,’ said Fed Chairman Jerome Powell. Photo: Associated Press
The U.S. economy is probably going to be fine, but the Federal Reserve looks likely to lower rates this week anyway.
There is some sense to that: With all the potential economic threats out there, the Fed worries that staying on hold could be riskier than cutting rates. But the danger is that the Fed is entering a spiral where increasingly remote tail risks will lead it to keep lowering rates until it has next to no rate cuts left to give.
With the unemployment rate near a 50-year low, consumer spending solid and inflation beginning to perk up, it seems incongruous at the moment to cut rates. But trade tensions, a slowing global economy and, now, last weekend’s attack on Saudi Arabian oil facilities, all count as reasons to worry.
Those worries are magnified by the fact that the Fed’s current target range for overnight rates, at 2% to 2.25%, is already quite low. That leaves it with little ammunition if it is confronted by a recession—indeed in the past the central bank has had to cut rates by around 5 percentage points in response to a recession.
As a result, the Fed arguably should be readier than usual to lower rates in response to threats, and stave off the possibility of recession, than it might be otherwise. Or, as Fed Chairman Jerome Powell put it in June, “An ounce of prevention is worth a pound of cure.”
Say there is a one-in-five chance that global problems lead companies to reduce employment in the U.S. or spook consumers into spending less. If overnight rates were now set at 5%, the Fed might be more comfortable waiting to see how the situation develops than it is now.
By this logic, however, as the starting rate goes lower, the Fed needs to get even more aggressive responding to remote but worrying possibilities. If policy makers cut rates at the conclusion of their meeting Wednesday and then cut rates one more time this year, as most economists expect, the Fed’s target range will be 1.5% to 1.75% at the start of 2020.
If the Fed then perceives a one-in-10 danger, should it cut rates in response? Where does it end? Rates could end up slipping toward zero even before an actual downturn materializes.
miércoles, septiembre 18, 2019
THE FED´S TAIL-CHASING PROBLEM / THE WALL STREET JOURNAL
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Etiquetas:
Monetary Policy,
The Fed,
U.S. Economic And Political
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Estimados amigos,
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
Paulo Coelho
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
Paulo Coelho

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