US is “on an unsustainable fiscal path, there’s no hiding from it.”
I have to say, Fed Chairman Jerome Powell is a breath of fresh air when he talks, after the near-physical pain I experienced listening to his last three predecessors. I actually get what he is saying, even if it’s a little twisted. I can make out his veiled disdain for fancy but dubious economic theories and iffy forecasts. And I get to look forward to some zingers when I least expect them – such as at today’s press conference, when he valiantly defended the Fed’s preferred inflation measure, core PCE, by saying that it “tends to run a little lower, but that’s not why we pick it.”
About that wildly ballooning federal deficit:
Even though the question came at the end of the press conference, I’m pulling it to the top because it’s so important. Asked if fiscal policy – the ballooning deficit, after tax cuts and spending increases – comes up a lot at FOMC meetings, he said:
“It doesn’t really come up. It’s not really our job…. We don’t have responsibility for fiscal policy. But in the longer run, fiscal policy will have a significant impact on the economy, so for that reason, I think, my predecessors have commented on fiscal policy, but they have commented on it at a high level rather than trying to get involved in particular measures.
“My plan is to stick to the same approach, and stay in our lane. So I would just say, it’s no secret, it’s been true for a long time, that with our uniquely expensive healthcare delivery system and the aging of our population, we’ve been on an unsustainable fiscal path for a long time. And there is no hiding from it, and we will have to face that, and I think the sooner the better.
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NEW YORK – As we mark the decennial of the collapse of Lehman Brothers, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. But looking ahead, the more relevant question is what actually will trigger the next global recession and crisis, and when.
The current global expansion will likely continue into next year, given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession.
There are 10 reasons for this. First, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.
Second, because the stimulus was poorly timed, the US economy is now overheating, and inflation is rising above target. The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar.
Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.
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