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Federal Reserve prepares for next crisis, bets it will begin like the last

Federal Reserve prepares for next crisis, bets it will begin like the last thumbnail

The Federal Reserve painted a picture of the U.S. economy that was almost too good to be true at its last meeting, with inflation seen contained in the near future despite the lowest unemployment rate in 20 years.

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

The Fed’s forecasts were labeled “out of this world” by one economist at the annual National Association for Business Economics (NABE) conference in Boston this week.

On the tenth anniversary of the 2008 financial crisis, which started with an unexpected panic in an under-appreciated corner of the financial sector, the emphasis in recent Fed speeches and research on avoiding excess leverage and financial market imbalances is understandable, but risks ignoring the possibility that the next recession may result from runaway inflation.

“There clearly has been a shift at the Fed toward more attention” to leverage ratios, financial buffers and other measures of financial market resilience, said Robert Gordon, economist and social sciences professor at Northwestern University and an expert on productivity and economic growth. “They have governors who are particularly appointed to be in charge of that now in a sense that they didn’t used to.”

Earlier, Gordon told the NABE conference that the Fed’s inflation forecasts were “unbelievable” and continued strong job creation will inevitably boost prices even though few see an immediate threat.

Global trade policy tensions, an emerging market debt crisis, or some other shock may happen, but would need to be large and sustained to undermine the 3.0 percent growth that the $20 trillion U.S. economy is currently enjoying.

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Few believe the U.S. housing sector poses the same risk it did in the early 2000s, and while student loans and other consumer borrowing have grown, overall household credit and debt payment levels are manageable.

Still, if the Trump administration nominates the Fed’s former financial-stability guru, Nellie Liang, as a board governor, as expected, efforts to avoid another financial crisis could increase further.

In reports to Congress the Fed has, for example, highlighted concerns about commercial real estate and the stock market where rising prices could reverse sharply as interest rates rise.

The likely choice of Liang comes after Fed chair Jerome Powell recently downplayed the relevance of traditional inflationary signals in setting interest rates and noted that in the last two recessions the trouble started in financial markets.

“Risk management suggests looking beyond inflation for signs of excesses,” he said in late August at the annual conference in Jackson Hole, Wyoming.

Yet Powell also said last month he sees only moderate risks across a dashboard of indicators, including household leverage and current bank capital levels.

TIME FOR A BUFFER?

A test may come in two months when Fed governors decide whether to raise the so-called countercyclical capital buffer for banks which would force them to set aside more capital to cushion a downturn.

Fed Governor Lael Brainard has argued the buffer should be raised from zero, citing the shot of fiscal stimulus from last year’s U.S. tax cuts and high asset prices in the context of a decade-long economic expansion.

Metrics analyzed by Liang as head of the Fed’s financial stability division are not yet cause for concern, but her research has made clear that tools like the countercyclical buffer could be used to limit credit growth before it becomes problematic.

CYCLE ENDINGS

Liang, a senior fellow at Brookings Institution, has also argued that tighter monetary policy and early intervention is best to ward off possible crises, so some expect her to oversee a broader financial stability file as a Fed governor.

Financial market imbalances could be sparked by spending from the 2017 tax cuts or further stock price gains, Goldman Sachs economists wrote recently.

Yet with unemployment at 3.9 percent, and U.S. banks stabilized by post-crisis regulations, many economists believe the end of this long business cycle will be marked by a traditional resurgence of inflation and corresponding Fed interest rate rises.

The Fed itself expects unemployment to hover between 3.5 and 3.7 percent through 2021, roughly a full percentage point below levels seen as consistent with a stable inflation rate.

“I think it’s inevitable it will be associated with higher rates of inflation,” said Harvard economics professor James Stock, a former member of President Barack Obama’s Council of Economic Advisers.

The Fed has been raising interest rates gradually since late 2015 to head off future problems but it is less clear how rising rates might affect risk-taking in the “shadow” banking sector, where hedge funds and other less-regulated firms extend credit to riskier companies. In July, the Fed warned that “borrowing among highly levered and lower-rated businesses remains elevated.”

In a recent paper presented at the Brookings Institution, former Fed Chair Ben Bernanke said one lesson from the crisis is that policymakers needed to include interactions between credit markets and the economy in their projections, in effect weaving financial stability concerns into models of how the economy responds to different shocks.

Asked how concerned he was about current financial market signals, Boston Fed President Eric Rosengren told the conference on Monday: “I don’t think there is an alarm going off. But I do think there are a lot of yellow lights.”

Reuters



14 Comments on "Federal Reserve prepares for next crisis, bets it will begin like the last"

  1. Here we go again on Sat, 6th Oct 2018 1:00 pm 

    That’s correct, seems the Banksters are repeating History…since they got much richer than they could ever imagine from the last crisis….Super smart Smarties….

  2. Anonymouse1 on Sat, 6th Oct 2018 2:40 pm 

    That is exactly what the NOT-Federal, NO Reserve does. It paints pretty pictures of George washingdum on pieces of paper, and then hands them over to a cabal of privately owned banks, based in jew York City. From there, it is wisely re-invested by the gurus of financial wizardry that infest, I mean, operate, out of a place called ‘wall street’.

  3. Davy on Sat, 6th Oct 2018 3:31 pm 

    lol, anon mouse1 talking finance and economics in dialect. What a fool. You know he has to throw in a sentence or two with some Jew baiting to give it a feel of deep conspiracy. Wow, what intelligence.

  4. makati1 on Sat, 6th Oct 2018 6:54 pm 

    The Fed is on track to take down the US economy. The next crash will be the last as it will take the US into the 3rd world for keeps. After all, that is the purpose that the Fed was designed for. Look at it’s 105 year history. It has caused all of the recessions/depressions since it was formed in 1913. This one will top them all. The Forever Depression/Great Leveling. Be patient. Its coming.

  5. Go Speed Racer on Sat, 6th Oct 2018 7:17 pm 

    This is EXACTLY why it’s so important to
    put old sofa’s and tires into a pile,
    and set it all on fire.

    BECAUSE after the next big crash, it’s all
    we will be able to afford, for entertainment.

  6. Go Speed Racer on Sat, 6th Oct 2018 7:20 pm 

    Animal-mouse-1, it’s important to NOT be
    anti-semitic about New York City, calling
    it ‘jew york city’. After all, there are
    over 6 Million jews living there, specifically
    all the ones supposed missing
    from World War 2, that’s where they
    live nowadays. Mel Gibson said so,
    so it must be true.

  7. twocats on Sat, 6th Oct 2018 7:20 pm 

    meanwhile – back in reality, where oil doesn’t get printed out of a press, there is a palpable sense of desperation.

    https://www.worldenergyreports.com/news/detail/iea-boss-urges-oil-producers-to-ease-supply-concerns-206893

    and if the Go Team! Exporters don’t come through —- then the same thing that happened in 2007 will happen today —- the world economy will tank, prices will remain elevated, and that will give producers a chance to play catch up. Oil just needs to catch its breath – that’s all.

  8. Davy on Sat, 6th Oct 2018 7:24 pm 

    “The Fed is on track to take down the US economy.”

    They are sure doing a number on your Asia, billy. Have you looked at the numbers lately? LOL.

  9. makati1 on Sat, 6th Oct 2018 9:11 pm 

    Davy, I look at the real numbers, not your US MSM propaganda. Keep sucking up that Koolaid as your country goes down the toilet.

    The Ps has 6+% growth this year and only a 25% National Debt to GDP. The US can only dream of those numbers. (<3% growth and 105+% National Debt to GDP)

    Deny all you want. It doesn't change reality. But then, you do not live on the real world. As for Asia, we will mange quite well in the coming "reset" as the IMF calls the collapse of America. LMAO

  10. makati1 on Sat, 6th Oct 2018 9:15 pm 

    twocats, who gives a damn about oily subjects? It’s all lies and guesses. You have zero control over any of it and have no idea what will happen even tomorrow so why discuss it. It’s like talking about the weather.

    You do have some control over your own life and circumstances so prepare for the worse and hope for the best. That is more important than anything you read online.

  11. Anontarded1 on Sat, 6th Oct 2018 9:52 pm 

    aswange, you’re a real blowhard. you said you’d just walk to your virtual farm and find food. oh wow, when is blowing hard equivalent to producing real food that one can use as sustenance. what about the malaria that gets you when you’re out there foraging? what about tropical insects causing all sort of diseases while you forage?

    you’ve lost it aswang.

    producing food is not easy. supertard took the hard way but got ensnared with permacutism while lazy man farming and the superior aquaponic would do.

    look, phils is 3rd world garbage. you still haven’t solved the public health issue. supertard gave me safe electricity, indoors plumbing, and industrial ag. that took care of 99% of health problems. the other 1% is where they make money off of but that’s a different post.

  12. Anontarded1 on Sat, 6th Oct 2018 10:06 pm 

    aswange (pbuh, swt), you have your facts and i have mine

    https://wwwnc.cdc.gov/travel/destinations/traveler/none/philippines

    when was the last time supertards’ america on the news about malaria? yeah we have issues with west nile and stuff but phils has a bit of a problem don’t you think?

    you put goebels to shame. you may as well convert to islam because they lie constantly.

    what happens when supertards (pbuh, swt) A10 meet an allah fronting islamic? pieces.

  13. makati1 on Sun, 7th Oct 2018 12:20 am 

    A non brain, are your meds not working? Insanity seems to be poking its nasty heat out of your PC.

    You know nothing of conditions here. Probably have never been closet to Asia than the local Walmart.

    Deaths from malaria by country:

    Ps = ~71 malaria deaths, per 105,000,000 people, PER YEAR. That is the TOTAL population of the Ps. About 71 deaths per year.

    https://www.worldlifeexpectancy.com/cause-of-death/malaria/by-country/

    You have more suicides / drug deaths / car accident deaths PER DAY in the US and you want to scare me with your bullshit?

    As I said, your insanity is showing, tard. LMAO

  14. Davy on Sun, 7th Oct 2018 5:33 am 

    “twocats, who gives a damn about oily subjects?”

    Billy, what is the name of this site? I know you want this to be your personal message board for anti-American topics but it is not.

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