Monday, October 13, 2014

Behind the Curtain
Last Tuesday, FRB-NY President Bill Dudley said that the FOMC is likely to start hiking rates around mid-2015. Last Thursday, Fed Vice Chairman Stanley Fischer agreed with Dudley on the timing of the “lift off” for rates. The latest FOMC minutes released last Wednesday strongly suggested that such forward guidance is meaningless since the Fed’s policy remains data dependent. In addition, the economic indicators that are important to the policy-setting committee can and do change. The minutes suggested that the FOMC is now giving some weight to the pace of foreign economic growth as well as the foreign-exchange value of the dollar.

These new considerations might delay lift off. So why have stocks sold off so hard? If the Fed is stymied from normalizing monetary policy by overseas developments, then our wizards might be trapped without an exit strategy. At the same time, there certainly isn’t much the Fed can do to stimulate global economic growth. In fact, if the Fed delays raising interest rates, then the euro might stop its recent freefall, which Draghi is counting on to revive Eurozone growth and inflation. The same can be said for the yen and Kuroda.
(Based on an excerpt from YRI Morning Briefing)

Thursday, October 9, 2014

Dudley Sees First Rate Hike Coming in Mid-2015
QE will be terminated at the end of this month. In and of itself, this shouldn’t be a problem for the stock market, in my opinion. However, its termination sets the stage for rate hikes by the Fed next year.

FRB-NY President William Dudley spoke on Tuesday. In his prepared remarks, he said, “What I can say with greater certainty is that there still is a significant underutilization of labor market resources.” He is among the leading doves on the FOMC and tends to have the exact same views about monetary policy as Fed Chair Janet Yellen.

This implies that the FOMC will be in no rush to raise interest rates next year, and will do so very gradually. Nevertheless, Dudley added, “The [FOMC’s] consensus view is that lift-off will take place around the middle of next year. That seems like a reasonable view to me. But, again, it is just a forecast.” Dudley did mention the stronger dollar, but toned down his concern about it, which he had expressed at a 9/24 Bloomberg conference. For now, he sees it as “limiting the upside risk” of better-than-expected economic growth and higher-than-expected inflation.

Dudley mentioned that inflationary expectations remain “well anchored” despite the recent drop in the yield spread between the 10-year Treasury and comparable TIPS recently. He did not say, as he had at the 9/24 conference, that the strong dollar might push the core PCED inflation further below the Fed’s 2% target as import price inflation diminished.
(Based on an excerpt from YRI Morning Briefing)

Tuesday, October 7, 2014

Anchor Aweigh
There’s a close inverse correlation between the expected inflation rate--as measured by the yield spread between the 10-year Treasury and the comparable TIPS--and the trade-weighted dollar Since the start of the year, expected inflation has been hovering in a range between 2.12% and 2.31%. It dropped significantly in recent weeks to 1.93% yesterday, coinciding with a sharp increase in the dollar. The TIPS yield has edged down recently, but isn’t down as much as expected inflation. In other words, most of the recent decline in the bond yield was attributable to falling inflationary expectations, which may be related to the stronger dollar.

Fed officials keep close watch on inflationary expectations in the TIPS market. Each of the 11 FOMC statements from December 12, 2012 through June 18, 2014 included the following boilerplate language: “longer-term inflation expectations continue to be well anchored.” That assessment is primarily based on the TIPS yield spread.

The TIPS spread suggests that inflationary expectations are no longer well anchored; instead, they are falling sharply. All the more reason to hold off on hiking the federal funds rate.

The question is why is the spread narrowing sharply? Here’s the rub: It may be narrowing because foreign investors are piling into the US bond market, which is why the dollar is strong. Of course, the strong dollar encourages foreigners to pile in some more since that increases their return in their local currencies. The reason they are doing so is because US bond yields well exceed foreign bond yields, especially in Japan and the Eurozone.

But US bond yields have exceeded foreign bond yields in Japan and the Eurozone all year. What’s changed? The drop in those overseas yields relative to US yields has been especially dramatic this year. Foreign investors have become increasingly convinced that the weak performances of the economies of Japan and the Eurozone will force the BOJ and ECB to maintain their ultra-easy monetary policies and provide additional easing measures if necessary.

In other words, the narrowing of the TIPS spread may have nothing to do with inflationary expectations in the US. Rather, the spread is narrowing because foreign investors are reaching for yield in the US. In Japan and the Eurozone, the central banks are seeking to avert deflation. Their efforts to do so are depressing their currencies and narrowing the TIPS spread in the US.

Fed officials might fret that inflationary expectations are declining, and hold off on raising the federal funds rate. That might actually push bond yields in the US still lower, exacerbating the decline in the TIPS market’s presumed measure of inflationary expectation.
(Based on an excerpt from YRI Morning Briefing)

Monday, October 6, 2014

One and Done?
Friday’s employment report was so good that the Fed’s doves should be hard pressed to put a bad spin on it. They’ve been doing just that to previous employment reports especially since Janet Yellen became the Fed chair on February 3 this year. She’s consistently focused on the weakest numbers in the monthly employment reports. The Fed’s doves want to hold off on raising rates for as long as possible. However, they’ve also said that monetary policy is data dependent.

With the unemployment rate down to 5.9% during September (the lowest since July 2008), the FOMC will be under lots of pressure to start raising the federal funds rate sooner rather than later in 2015. Here’s next year’s FOMC meeting schedule: January 27-28, March 17-18*, April 28-29, June 16-17*, July 28-29, September 16-17*, October 27-28, and December 15-16*. The ones with an asterisk will be followed by a press conference, which will give Yellen the opportunity to explain why the Fed decided to finally start raising interest rates. Given the strength in the labor market, I pick March 18 as D-Day.

Let’s recall what Fed Chair Ben Bernanke said last year at his June 19 press conference:
And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7.0 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.
Well, here we are with QE scheduled to be terminated by the end of this month and the jobless rate under 6.0%. Regarding when the Fed will raise interest rates after QE is terminated, Bernanke said, “As I mentioned, the current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded.”

The phrase “considerable time” has been part of the boilerplate of the FOMC statements (in this post-QE context) since the December 12, 2012 statement, when the FOMC voted to morph QE3 (Fed buys $40bn/month in mortgage securities to infinity and beyond) was morphed into QE4 (Fed also buys $45bn/month in Treasuries) until the unemployment rate falls to 6.5%. It did so in April, falling from 6.7% to 6.3%. The strength of the latest employment report suggests that “considerable time” should be dropped from the next FOMC statement on October 29, especially since QE will be terminated by then. (See our searchable archive of FOMC statements.)

Of course, doves will always be doves. Consider the following:

(1) Yellen has a dashboard. Yellen can still find some weak labor market indicators on her “dashboard.” Most importantly, wage inflation remained at 2.0% y/y, well below her target of 3.0%-4.0%. The labor force participation rate fell to 62.7% during September, the lowest since February 1978. On the other hand, the short-term unemployment rate remains very low at 4.0%, while the long-term rate is down to only 1.9%, the lowest since February 2009.

(2) Evans advocates patience. Last Monday, FRB-Chicago President Charles Evans, who flies with the FOMC’s doves, told CNBC that he believes it would be "quite some time" before it's appropriate to start tightening. Evans sees June as a possibility for the first rate increase.

(3) Dudley is watching the dollar.On 9/24, Bloomberg’s Simon Kennedy reported that FRB-NY President William Dudley is the first Fed official starting to freak out about the strong dollar:

The risk is that Evans and Dudley are both correct. If the dollar continues to strengthen on expectations of a Fed rate hike, it could go to the moon on the first actual hike and threaten to slam the brakes on the economy just as the Fed is finally convinced that it has achieved escape velocity. If so, then that could be “one and done” for rate hikes.

Conceivably, it could also be “none and done.” When the FOMC finally votes to implement its exit strategy from ultra-easy monetary policy, they might find that the door is locked and no one has the key. In this scenario, stock prices could very well melt up.

I’m just thinking outside the box here. Other than last year’s taper tantrum in the financial markets, the Fed has succeeded in exiting QE. The Fed might succeed in normalizing monetary policy starting next year by raising the federal funds rate in a gradual fashion. What’s changed recently for the FOMC, and could complicate the committee’s exit strategy, is the strength in the dollar, which bears watching.
(Based on an excerpt from YRI Morning Briefing)

Thursday, October 2, 2014

Fed Rate Hikes Coming
As I noted in my 9/30 Fed Blog post, FRB-Chicago President Charles Evans told CNBC on Monday that he believes it would be "quite some time" before it's appropriate to start tightening. Evans sees June as a possibility for the first rate increase, but said on CNBC’s Squawk Box that if it were his decision, he'd wait even longer. “If you look at the risks, we ought to balance those and be concerned that sometimes coming out of zero [rates] ... is really a difficult proposition for the economies. And so I'd like to be patient.”

I predicted that there might be more tightening tantrums ahead if investors share Evans’ concerns that the economy might go wobbly on the first rate hike. Most economists believe that once the Fed starts raising rates, that will be a sure sign that the economy has finally achieved the long hoped-for “escape velocity,” which should be bullish for stocks.

Why might a small initial increase in the federal funds rate turn into a serious problem for the economy and the stock market? For starters, it could send the dollar to the moon. That would depress the dollar value of corporate profits earned abroad. It would also depress exports and boost imports.

A more disturbing scenario would be a collapse of the corporate bond market. Investors have been piling into the market as they’ve been reaching for yield. Corporations have responded by issuing bonds at a record pace. Data compiled by the Fed show that nonfinancial corporations (NFCs) raised a record $741 billion in the bond market over the past 12 months through July. A significant portion of those funds were used to refinance outstanding debt at lower yields. The Fed’s Flow of Funds data show that net issuance by NFCs totaled $287 billion over the past four quarters through Q2.

On Tuesday, the WSJposted an article titled, “Corporate Bond Sales Coming at Blockbuster Pace.” Here’s the main finding:
Bond sales from highly rated companies in the U.S. clocked a record pace through the third quarter, as companies took advantage of low rates and investors sought out securities that pay more interest than low-yielding government bonds.

Highly rated firms sold about $913 billion of bonds in the U.S. in the first nine months of 2014, up from $869 billion last year, according to Dealogic's figures, which go back to 1995. That puts the investment-grade U.S. market on pace to beat last year's record issuance of about $1.1 trillion, according to Dealogic.
On Monday, the WSJ posted a similar article about the European bond market titled, “Europe’s Corporate Borrowing Set to Hit Pre-Crisis Peak.” Emerging market borrowers have also been raising plenty of money in the global bond markets.

Lots of those bonds have been purchased by retail and institutional investors, some of whom might try to sell them when the Fed starts actually raising interest rates. The problem is that the corporate bond market tends to be illiquid on a good day. This could be a nightmare scenario for bond funds if they are faced with lots of redemption orders with few buyers for their bond holdings. During July, there was a record $3.6 trillion in bond funds and ETFs.

Blackrock, the world’s largest money manager, is concerned. That’s according to a 9/22 Bloomberg story titled, “BlackRock Urges Changes in ‘Broken’ Corporate Bond Market.” Here’s the main point:
Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90 percent of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.
If a minor initial Fed rate hike does destabilize global bond markets, then there probably won’t be a second rate hike. That would seriously damage the credibility of the Fed, where the official party line has been that exiting ultra-easy monetary policy won’t be a problem.
(Based on an excerpt from YRI Morning Briefing)

Tuesday, September 30, 2014

Life After QE
Will there be life after QE? The Fed is scheduled to terminate this program at the end of October. There’s no doubt that investors are starting to fret about what comes after QE. They realize that once QE is terminated, all the focus will be on when the Fed will start raising interest rates. So recent comments on this subject by members of the “Federal Open Mouth Committee” seem to be having more impact on daily trading, contributing to the market’s volatility. Consider the following:

(1) Richard Fisher is a retiring hawk. Last Thursday’s 1.6% drop in the S&P 500 was widely attributed to FRB-Dallas President Richard Fisher's warning that interest rates may rise “sooner rather than later.” Of course, he is widely known as a hawk. In fact, he dissented at the last meeting of the FOMC according to the official statement: “President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance.”

Fisher said the Fed might start raising rates around the spring of 2015. He won’t be a voting member of the FOMC next year. Actually, he recently announced that he plans to retire next year. In the past, his comments have never had much if any impact on the markets since the Fed’s hawks have been consistently outnumbered by the doves.

(2) Charles Evans is an influential dove. On the other hand, FRB-Chicago President Charles Evans yesterday told CNBC that he believes it would be "quite some time" before it's appropriate to start tightening. Evans is one of the Fed's dovish regional chiefs. While not a voting member on the central bank's policymaking committee this year, he's a 2014 alternate and will be voting next year. He has been an influential dove, convincing the FOMC to tie policy to the unemployment rate in late 2012.

Evans sees June as a possibility for the first rate increase, but said on CNBC’s Squawk Box that if it were his decision, he'd wait even longer. “If you look at the risks, we ought to balance those and be concerned that sometimes coming out of zero [rates] ... is really a difficult proposition for the economies. And so I'd like to be patient.”

(3) James Bullard is a bellwether. Last Tuesday, FRB-SL President James Bullard said that, at the next meeting of the FOMC on October 28-29 (after QE has been terminated), the Fed may need to drop its “considerable time” pledge for when interest rates will rise. He said, “I would like to get the committee to move to something that is more data dependent.” Bullard won’t have a vote on policy until 2016. Nevertheless, an article in Bloomberg recently described him “as a bellwether because his views have sometimes foreshadowed policy changes.”

(4) William Dudley is watching the dollar. Last Wednesday, Bloomberg’s Simon Kennedy reported:
As Federal Reserve Bank of New York president, [William] Dudley is the only regional Fed chief with a permanent vote on policy and is the central bank’s eyes and ears on Wall Street. So when Dudley says something new it’s worth tuning in. And this week he became the first Fed official to comment on the U.S. dollar since the Bloomberg Dollar Spot Index touched its highest level on a closing basis since June 2010.

“If the dollar were to strengthen a lot, it would have consequences for growth," the 61-year-old Dudley, a former Goldman Sachs Group Inc. economist, said at the Bloomberg Markets Most Influential Summit in New York. "We would have poorer trade performance, less exports, more imports,” he said. "And if the dollar were to appreciate a lot, it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account."
The JP Morgan trade-weighted dollar jumped 1% last week to the highest reading since June 7, 2010.

5) “Tightening tantrums” ahead. All this means that we can look forward to spending October wondering (as we did before the September 16-17 meeting of the FOMC) whether “considerable time” will be dropped from the next statement. It probably will be deleted from the Fed’s boilerplate message. In any event, we can expect more “tightening tantrums” ahead. The stock market may be just as freaked out as Evans is by the notion that the economy might go wobbly on the first rate hike.
(Based on an excerpt from YRI Morning Briefing)

Monday, September 22, 2014

Yellen's Spin
Fed Chair Janet Yellen still knows how to sprinkle the fairy dust on the stock market. I’ve noted in the past that ever since she joined the Fed, stock prices usually have moved higher whenever the “Fairy Godmother of the Bull Market” has spoken publicly about monetary policy and the economy.

She first served at the Fed as vice chair of the Board of Governors, taking office in October 2010, when she simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024. Since becoming the Fed chair on February 3, 2014, for a four-year term ending February 3, 2018, her power to charge up the bull has clearly increased. She did it again last week when she spoke at her third press conference as Fed chair after the latest meeting of the FOMC on Wednesday, September 17. The S&P 500 rose 0.6% from the closing price on Tuesday to Thursday’s closing price, hitting yet another new record high of 2011.23.

In my 9/18 Fed Blog post, I discussed Yellen’s “Theory of Relativity.” Here are some additional related points:

(1) The beat goes on. By my count, Yellen has spoken publicly about monetary policy and the economy eight times since assuming the top job at the Fed. The market has rallied every time with one exception, on March 19 when she said at her first press conference that “considerable time” meant about six months. In other words, six months after the projected termination of QE by the end of October, the Fed would start hiking the federal funds rate. That would be April 2015.

(2) Time isn’t measured with a clock. She subsequently backed away from such specific forward guidance. Indeed, during her press conference last week, she reiterated that Fed policy is data dependent, not date dependent: “I know ‘considerable time’ sounds like it's a calendar concept, but it is highly conditional and it's linked to the Committee's assessment of the economy.” As noted in last week’s FOMC statement, as long as the committee judges that “a range of labor market indicators suggests that there remains significant underutilization of labor resources” and that inflation is running below 2.0%-2.5%, Yellen and most of her colleagues are in no rush to raise interest rates.

(3) The “dot plot” is also meaningless. What about the “dot plot” showing the federal funds rate forecasts of all the participants of the FOMC whether they are voting members of the committee or not? The latest one was released along with the FOMC statement last Wednesday. It shows an upward drift from the previous plot released on June 18.

However, as Yellen said at her previous press conferences, the dot plot is as meaningless as “considerable time.” She reiterated that Fed policy is data dependent, suggesting that the forecasts are just a game they play on the FOMC. At her latest press conference, Yellen said over and over again that there is a lot of uncertainty about the Fed’s forecasts, even over the next few quarters, so just ignore the FOMC’s median forecast for where the fed funds rate will be at the end of 2017.

She first minimized the importance of the dot plot at her first press conference as Fed chair on March 19: “But, more generally, I think that one should not look to the dot plot, so to speak, as the primary way in which the Committee wants to or is speaking about policy to the public at large.” She did it again at her second press conference on June 18: “And around each of those dots, I think every participant who’s filling out that questionnaire has a considerable band of uncertainty around their own individual forecast.”

(4) Back to “measured” pace of rate hikes? The FOMC raised the federal funds rate by 25bps at every meeting during the “measured” pace of tightening under Fed Chair Alan Greenspan from May 4, 2004 through December 13, 2006. Last Wednesday, the WSJ MarketWatch posted an interesting analysis of the latest dot plot, showing that it implied rate hikes at every meeting once the Fed starts raising rates again.
(Based on an excerpt from YRI Morning Briefing)

Thursday, September 18, 2014

Yellen's Theory of Relativity
The Fed is in no rush to raise interest rates sooner than Fed watchers expect. Most of them expect the Fed to start doing so next year either in the spring or early summer. So yesterday’s statement retained the “considerable time” language that has been in the FOMC statements since the September 12-13, 2012 meeting of the committee. Back then, the specific sentence stated:
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.
This sentence was tweaked in the December 12, 2012 statement as follows:
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends.
That program will end at the next meeting on October 28-29. Most Fed watchers seem to believe that six to nine months is a considerable time, which would mean that the first rate hike should be during either April, May, June, or July of next year.

As widely expected, during her press conference, Fed Chair Janet Yellen reiterated that there is room for improvement in the labor market. She noted that while inflation has risen in recent months, it remains below the Fed’s target. Fed policy remains data dependent, which means that the normalization of monetary policy will depend on the performance of the economy. So once the Fed starts raising interest rates, it could happen at a slow pace or at a fast pace.

On balance, there were no surprises yesterday other than for those of us who thought there was a chance that “considerable time” would be dropped. Clearly, Yellen is solidly in charge of FOMC policymaking, and she is among the most dovish members of the committee. In any event, during the Q&A session of the press conference, Yellen said that “considerable time” has nothing to do with time. She stressed that Fed policy is data dependent. So the Fed will hike rates when the data say it’s time to do so, not when the clock says so. In other words, “considerable time” is basically meaningless. Got that?

The Fed will maintain ultra-easy monetary policy as long as the economy needs it, which will depend on the FOMC’s assessment of the incoming data.
(Based on an excerpt from YRI Morning Briefing)

Thursday, August 21, 2014

Jackson Hole
Central bankers like to get together on a regular basis at nice locales. They do so every year in late August at Jackson Hole, Wyoming. This annual conference brings together the top honchos of the major central banks. They tend to focus their discussions on the hot issues of the day. This year’s topic is “Re-Evaluating Labor Market Dynamics.” The program for the August 21-23 meeting will be posted today at 6 p.m., MT. Last year’s topic was “Global Dimensions of Unconventional Monetary Policy.”

On Wednesday, Bloomberg’s Simon Kennedy reported:
Every time then-Federal Reserve Chairman Ben S. Bernanke spoke at the annual monetary policy symposium in the shadow of Wyoming’s Teton mountains since 2007, stocks rallied. With Janet Yellen set to make her first speech to the conference as central bank chief on Aug. 22, investors may be setting themselves up for a fall, according to Steven Englander, global head of G-10 foreign exchange strategy at Citigroup Inc.
Kennedy noted that from 2007 to 2012, Fed Chair Ben Bernanke’s keynote speech was bullish, with the S&P 500 up an average 1.3% that day. Bernanke skipped last year’s meeting. Englander was quoted as saying that Fed Chair Janet Yellen’s speech could be a letdown: “We worry that dovishness is increasingly anticipated and that by the time we get to her talk anything less than ‘full dovishness’ will be a disappointment.”

I’m not worried. As I noted yesterday, I expect that the “Fairy Godmother of the Bull Market” won’t let us down. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous. I’m sure she still thinks so, and might very well say so again on Friday.

Yellen is a Yale PhD macroeconomist with particular interest in the labor market. She is also a liberal and believes that the labor market needs all the help it can get from the Fed. I doubt that she picked the topic for discussion at Jackson Hole, but I’m sure the folks at the Kansas City Fed, which has been hosting the conference since 1978, did so to please the boss.

Yellen’s liberal bias was plain to see in the statement issued after the July 30 meeting of the FOMC. It noted: “Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.” The previous statement following the June 18 meeting noted: “Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.” This change in wording clearly reflects Yellen’s focus on the negatives rather than the positives in the labor markets.

I believe that American consumers are in better shape than Yellen believes. However, if she insists on helping them out with more ultra-easy money than they really need, then stock investors will continue to benefit as well. Again: Thank you, Fairy Godmother!

ECB President Mario Draghi will follow Yellen with the keynote luncheon address on Friday. It’s unlikely that he will drop any new “whatever-it-takes” bombshells, as he did on July 26, 2012. It’s unlikely that he will hint at the possibility of a Fed-style quantitative easing given the legal issues surrounding this program. Instead, he will most likely stress that the ECB’s recent easing moves, including TLTRO lending to the banks starting next month, should help to revive growth in the Eurozone. Unlike Yellen, he is likely to say that monetary policy can’t fix all of our problems, including structural ones in the labor market.
(Based on an excerpt from YRI Morning Briefing)

Tuesday, August 19, 2014

'Fairy Godmother' Will Speak on Friday
Investors may be looking forward to Fed Chair Janet Yellen’s speech at Jackson Hole on Friday. I’ve often affectionately called her the “Fairy Godmother of the Bull Market.” Stock prices tend to rise after she speaks about the economy and monetary policy. That happened often when she was a Fed governor, and has continued now that she is Fed chair.

A few Fed watchers are speculating that the upcoming speech would be a good opportunity for Yellen to signal that she is ready to normalize monetary policy, i.e., hike the federal funds rate. So they are expecting a hawkish speech. I disagree. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous:
If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery. That’s just what happened in 1936 when, following two years of robust recovery, the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system. The result? In 1937, the economy plunged back into a deep recession. Japan too learned that hard lesson in the 1990s, when both monetary and fiscal policies were tightened in the mistaken belief that the economy was rebounding.

These episodes teach us a valuable lesson that we should heed in the present situation. Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health. And, when the economy does come back, let it be built on a foundation of sound private investment and sustainable public policies. Only then can we be confident that we can escape destructive boom-and-bust cycles and build a more permanent prosperity. Thank you very much.
Thank you, Fairy Godmother!
(Based on an excerpt from YRI Morning Briefing)