The Federal Reserve may already have made a monetary-policy
mistake and paved the way for the next U.S. recession. As some economists such
as former U.S. Treasury Secretary Lawrence Summers warn the Fed will err if it
raises interest rates in December, Paul Mortimer-Lee of BNP Paribas SA is
taking a different tack as he argues it may have already blundered by not
hiking sooner.
“The die may already be cast and the path to the next
recession may have been taken,” Mortimer-Lee, BNP Paribas’s chief economist for
North America, told clients in a report last week. His worry is that by waiting
for the unemployment rate to fall to 5 percent, as it did in October, the Fed
has delayed too long to achieve a soft-landing. That level is already around
the 4.9 percent rate Fed officials reckon pushes up prices, but that estimate
could be too low and a recent pickup in wages suggests joblessness could
already be beneath the inflation trigger, he said.
The fact the economy is already growing faster than its
long-term trend means monetary policy may be overly easy and will stay so if
the Fed carries out its pledge to increase rates gradually, raising the risk of
an overheating, he said. As for inflation, weak investor expectations for it
may be hard to rally given the strengthening dollar, meaning higher rates will
only intensify such bets.
The upshot is that with joblessness likely to bottom out
below its current level, stabilizing inflation may ultimately mean the Fed has
to tighten policy enough to boost joblessness by half a percentage point, an
amount typically big enough to cause a recession, said Mortimer-Lee.
The Fed may have been better off raising rates a year ago
when economic growth and the labor market were stronger, manufacturing was less
of a drag, emerging markets were in better shape, oil prices were higher and
financial conditions were softer, Mortimer-Lee said.
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