The Era of Fed Power Is Over. Prepare for a More Perilous Road Ahead.

[question everything]

The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage. That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation. But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines.

The U.S. might not be far behind. “We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,” said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%. Workers, companies, investors and politicians might need to prepare for a world where the business cycle rises and falls largely without the influence of central banks.

(snip)

In November, Fed Chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.” As a result, he said, the Fed is studying ways to alter its strategy and develop tools that can work when interest rates approach zero.

(snip)

There are considerable doubts that any new tools can restore the influence of central banks, or that countries can overcome obstacles to more robust fiscal policy, particularly political opposition and steep debt. Business cycles in the future might resemble those of the 19th century, when monetary policy didn’t exist. From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896.

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https://www.wsj.com/articles/shrinking-influence-of-central-banks-ends-decades-of-business-as-usual-11579103829 (paid subscription)

[doc03]

1. We are in serious trouble when a recession hits and un-employment rises the trillion dollar

a year deficit will be become 2 or 3 trillion. Can we have a stimulus plan to dig us out then? If we have a tax cut that will explode the deficit even more. There is no room to lower interest rates.

[SCantiGOP]

2. Fed policy is supposed to be

Looking at 10 and 20 year trends and scenarios. That is why they have always been kept so isolated from Admin or Congressional interference.
Trump doesn’t see anything beyond the election in November. Very dangerous.
We would have very few weapons to fight a meltdown like we had at the end of the Bush Administration.

[Warpy]

3. The Fed's ability to do much of anything ended when the New Deal did

While the Fed might have had a more immediate and pernicious effect with a finite money supply is moot. Both the gold standard and fiat currency have brought us to the same point, that of wealth concentrated into few hands and hoarded instead of circulated, with innovation and entrepreneurship stifled as the majority drown in debt. The Fed has always been powerless to deal with end stage capitalism and I don't see any tools in its limited toolbox to deal with it now.

Money only works when it's moving and the Fed has no way to ensure that beyond having its mission completely redefined. Our problems are systemic and unlikely to be dealt with until the next major crash, if then. The Fed will be a spectator, nor a participant.

[question everything]

4. Welcome back!

So glad to read, again, your well thought and expressed thoughts.

Really interesting view of what, I think, most of us do not stop to think about.

[bronxiteforever]

5. Kick and recommend.