Wednesday, November 21, 2018

Top Council on Foreign Relations Economist Warns Economic Growth Will Start to Contract in Early 2019

Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations, emails a link of his recent CFR blog post, "The Fed Is Tightening More Than It Realizes."

Steil's contention is that rate hikes understate the degree of tightening the Fed has imposed over the past year. The reason is that the Fed appears to be underestimating the impact of its balance-sheet reduction operation.

Writes Steil (my emphasis):
The Fed's accumulation of longer-term Treasuries during nearly five years of Quantitative Easing (QE) was a big source of demand, and therefore lowered the term premium on longer-term Treasuries. (Former Fed Chair Ben Bernanke explains this well in his blog.) Fed economists estimated that yields on 10-year Treasuries at the end of 2017 would have been around 85 basis points higher than their then-level of 2.3 percent had the Fed not bought such bonds.
On the basis of these estimates of the effect of central-bank asset purchases on long-term rates, we calculate that asset run-offs so far—$24 billion per month on average—have boosted 10-year Treasury yields by about 17 basis points. Historically, an effect of that magnitude is roughly what we would expect from a 68 basis-point hike in the Fed’s policy rate...

What are the implications for the U.S. economy? The Fed estimates that once interest rates surpass three percent—their “neutral level”—monetary policy will shift from stimulating economic growth to constricting it. Today, the Fed expects that rates will remain below this neutral level until the end of 2019.  But by our calculations, the combined effects of balance-sheet reduction and conventional rate hikes will produce an equivalent tightening in monetary conditions much sooner: by the end of 2018. This fact suggests that monetary policy will start to contract economic growth early next year.
Steil has something here. It is very much in line with my thinking. In the EPJ Daily Alert, I put out a sell advisory on the stock market within days of the peak but haven't yet put out a warning on the entire economy but I did write in yesterday's ALERT:
 It is looking increasingly like we may be at the very start of a recession, A boost in money supply growth in coming weeks could reverse things but is doesn't look promising.

1 comment:

  1. What are your thoughts on financials, health care, and "defense" sectors? All, of course, along with academics and agriculture, are heavily subsidized by the federal government.