With a bond market signal pointing to a recession, policymakers have a choice: act now or hope that conditions change for the better.
With a reliable bond market signal pointing to a possible recession down the road, policymakers have a choice: act now to head off the downturn or hope that conditions will change for the better.
According to Russell's Business Cycle Index, the odds of recession over the next 12 months are around 30 percent which is"right on top of the warning threshold for leaning out of risky assets."Policymakers face a risk of not overreaching to correct for a recession that may not come, or seeming too complacent and risk causing a downturn simply by inaction.
The implication is that should inflation become a threat — it has not been for most of the past decade despite the Fed's historically easy monetary policy — it can be controlled with rate increases. Up until it revised its forecasts at least week's FOMC meeting, the committee had been indicating two rate increases in 2019. In addition to reducing that forecast to zero, the committee said it would be winding down a program in which it is reducing the value of bonds it holds on its balance sheet. That process will begin to taper in May and then stop completely in September.
Indeed, the above-trend growth in GDP since Trump became president has come on the back of massive fiscal adrenaline, courtesy of a huge tax cut, deregulation and hopes for infrastructure spending.
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