Cautionary advice from a former Fed Staffer

In Why It’s Still Too Early for the Fed to Start Raising Interest Rates, Andrew Levin writes:

The Federal Reserve has signaled that it will begin raising short-term interest rates at its Dec. 15 meeting. The Federal Open Market Committee has maintained its federal funds rate target close to zero for seven years, and it has frequently described the removal of monetary policy accommodation as “normalization.” So many will infer from this decision that the Fed judges the economy to be sufficiently close to “normal” to warrant the onset of tightening. Yet current economic conditions are not consistent with this action, and starting the tightening process now would pose substantial risks to the Federal Reserve’s statutory goals of maximum employment and price stability.


All of these considerations indicate that, instead of starting to remove monetary accommodation, the Federal Reserve should maintain its current policy stance until the employment shortfall has declined further and core inflation is moving definitively back toward its target.

He´s right. It´s nothing like Blinder´s “Be calm and carry-on”. Everyone should really be concerned that the Fed is likely to badly blunder once again, something that has been going on for almost a decade!

Levin makes comparisons to the 1990 and 2001 recessions, and the “tightening” that followed on the steps of the recoveries, where by tightening he means the rate “lift-offs” that took place.

The panel below shoes how dismal the Fed´s performance has been since Bernanke took the helm, which he passed on to Yellen early last year.

Compared to the 1990/91 recession, the 2001 recession was mild, more like a growth recession. Nevertheless, the recovery was protracted because the Fed “held spending growth back”.

Note that despite a comparative strong spending rebound following the 1990/91 downturn, inflation kept going down and twenty years ago reached the “gotcha (2%) level”. Since then, it has much of the time stayed below that threshold.

After managing to depress spending to an extent not seen since 1937/38, the Fed has been quite casual in bringing it back, actually stopping the process “short”.



Given the economy´s depressed state that resulted from the momentous monetary blunder, many feel that the “reserve cavalry” has to come to the rescue!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.