Fed's optimistic outlook ignores history

Federal Reserve officials will meet on Thursday to discuss monetary policy, and although nobody expects the central bank to raise interest rates this time, it is certain that there will be a lot of interest in how it addresses the recent turbulence in the financial markets. the light of his prospects for the "Goldilocks" economy. In other words, someone has to admit.

The minutes of the Federal Reserve meeting of 25 and 26 September revealed that a group of members of the Federal Open Market Committee was in favor of raising the federal funds rate, currently in a range of 2% to 2.25%, to beyond what is considered a neutral level to an area that limits economic growth.

President Jerome Powell of the Fed sets the neutral rate at around 3%. This is based on the fact that the unemployment rate remains below 4% until 2021 and that inflation remains at an idyllic level of 2.1%.

Even "Goldilocks" would blush before a scenario would be almost perfect. Consider that January 1966 is the only month since 1960, when unemployment was less than 4 percent and inflation was less than 2 percent. The Fed's projections until 2021 do not simply suggest that we will be there, but we will stay there for a very long time. Such fairy tales would accomplish something: fill the empty quadrant that that one resident has right now.

We have had a long period of well-controlled inflation, thanks to China's deflation throughout the world through its cheaper goods, technological advances that have lowered prices and, of course, the extraordinary efforts of monetary policy. in the post-Greenspan era. There is also a precedent that the unemployment rate remains below 4% for four years, as in the 1960s. But that episode was also accompanied by a functioning Phillips curve, with inflation rising from a starting point of 2% to 5 %.

Although a straight line between cause and effect can not be drawn, investors have been somewhat annoyed by the prospect of much higher rates since Powell nodded over how thin the economic environment is, noting that it would almost seem "too good for orphan . "He added to a large extent that" a better monetary policy has played a central role "in creating this perfect scenario. Well, yes, US $ 22 billion in global quantitative easing is a big help.

In exchange, financial markets are choking the world over because liquidity has withdrawn and there are few places to hide. As Bloomberg News reported on a recent JPMorgan Chase & Co. strategy, one in five asset classes has a positive performance this year and all markets except for the Nasdaq Composite Index used US loans. and the raw materials will have a lower yield than the cash.

However, most investors will continue to expect the best, which is characteristic of the behavior at the end of the cycle. How else would it be possible for 83% of companies to submit a request to raise money through first public offers that do not generate a profit? According to research by Jay Ritter, professor at the University of Florida, the share of non-profitable IPOs exceeds the previous peak of 81% in 2000, just as the Nasdaq tended to crisis areas.

The main difference between then and now is that we have the Fed in a double-hardened monetary policy, which raises interest rates and reduces the assets of the balance sheet, just as other large central banks begin to adopt stricter monetary policies, or at least less accommodative policy. That is to eliminate the liquidity of the global financial system.

All of this makes a stop and wonders where the American actions would be. in the absence of the forecast of US $ 1 trillion in 2018 share purchases. The only question is whether someone within the Fed has achieved the same and thus the recognition that the empty quadrant is not suitable to be filled in the coming years.

By Danielle DiMartino Booth

This column does not necessarily correspond to the opinion of the editors or of Bloomberg LP and its owners.