Is a U.S. Recession Simply Inevitable?
We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.
Somehow, Chair Yellen and the other members of the FOMC can look at real estate and stock prices galloping along at double-digit rates of growth and conclude that inflation is low. It may be that inflation measured by consumer prices is moderate, but asset prices suggest that the FOMC has once again instigated a financial boom in major markets that could threaten a still uneven economic recovery.
While the recession in 2008 and beyond was driven by a sharp reaction to the financial market crisis, the recession of 2020 may be driven by the necessary adjustment following a period of radical central bank action. The real question though is whether the FOMC will allow the U.S. economy to slip into recession without more radical measures.
With Chair Yellen not reappointed, the Fed’s willingness to engage in radical policies like zero interest rates and QE is likely to be reduced. While Chairman designate Jerome Powell is a centrist who has supported the policies of Yellen, there is little support for the Fed’s large balance sheet or the use of bank reserves to fund these operations on Capitol Hill. This limits the policy options of the Fed in the event of a recession.
Since 1987, the U.S. government (i.e. the Federal Reserve) has turned market stability into an entitlement, particularly for the stock market. The degree of government intervention in the markets has grown enormously since Black Monday 1987, with no authority or even acknowledgement from Congress. This begs the question as to whether the Fed—or the White House and Congress—are actually in charge of economic policy. But you can be sure that the current occupant of the White House does not want to see any policies coming from the Fed that will detract from U.S. economic performance between now and November 2020. Yet in the end, President Donald Trump is held hostage to the policies followed by the Fed over the past decade and more.
Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the financial services, mortgage finance and technology sectors.