A recession the Fed can’t easily fix
by Bill Fleckenstein
This slowdown wasn’t caused the usual way, so the usual remedy — flooding the economy with cash — isn’t a quick solution. But that won’t stop Washington from trying.
Most of the recessions in this country over the past 50 years were caused by the Federal Reserve raising interest rates to battle inflation. The two most recent recessions, though, were created not by Fed tightening but as a consequence of its reckless easy-money policies followed by the exhaustion of, first, the tech-stock bubble and, later, the housing bubble.
Thus, this is not a recession that can be easily stopped by the Fed simply relaxing monetary policy, as might have occurred in the old days. (Of course, the Fed hasn’t just relaxed policy — it has moved the monetary equivalent of heaven and earth.)
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For any doubters out there, please note the last paragraph of the committee’s communiqué: “The Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities . . . and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. . . . The committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.”
There’s an unwritten sequel to this story: The Fed will be exceedingly slow to remove that liquidity. Thus, whenever the economy stabilizes, at whatever level, the rate of inflation seen shortly thereafter will be quite substantial, I would guess.
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