FEDERAL RESERVES ”GRADUALISM?”
FED is signaling much greater gradualism relative to it´s normalization strategy of a decade ago – it could take as long as four years to return the Fed funds rate of a 3% norm. But the experience of 2004-2007 excess liquidity by gradual normalization leaves financial markets predisposed to excesses and accidents. Only by shortening the normalization timeline can the FED hope to reduce the build-up of systemic risks.
The sooner the FED takes on the markets, the less likely the market will take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crises.
Not only is the FED a creature of the financial markets, it is beholden to the markets. For some treasury durations, the FED became the market.
Unfortunately it´s not just the FED.
Global imbalances have never been worse. The Bank of Japan is the only market for Japanese Government debt. And in Europe, government debt trades at preposterously low and sometimes negative yields. The “Draghi Put” is at least as big as any “Put” by Greenspan.
The risk is not that the FED & Co will spawn more asset bubbles. It´s far to late to raise that concern. Massive bubbles in equities and bonds have already been blown. Banks that were “too big to fail” are far bigger now than ever before.
Beggar-thy-neighbor competitive currency debasement is the order of the day in China, Europe and Japan.
Let´s not pretend we have a choice that will prevent another devastating financial crises. We don´t. Only the timing is in question.
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