Photo: mango atchar on Flickr
Today’s CPI numbers were double expectations.But according to Morgan Stanley, the last thing the Fed (or anyone else) should do is start tightening. The bank took a historical look at economic slowdowns (Two successive quarters with an average growth rate of at most 1%Q SAAR) and “young expansions” (expansions that are eight quarters old or less )
Here’s what they found:
…two out of four occasions of the economy reaching ‘stall speed’ in a young expansion were followed by a recession within a few quarters. So, young expansions that slowed to ‘stall speed’ double-dipped 50% of the time. But what were the catalysts?
…both (were) because of monetary tightening: It turns out that both these recessions were precipitated by monetary policy. The 1981 recession was – deliberately – induced by the Fed in order to squeeze inflation out of the system (the recession essentially marked the beginning of the ‘Volcker disinflation’). And even the 1960/61 recession is thought by economic historians to have been caused by “the drastic tightening of money that occurred in 1959/60”.2
Conclusion: double-dips have only occurred upon Fed tightening: Whenever in post-war US history expansions have died young, the catalyst has been monetary policy tightening. Put differently: double-dips have occurred only when induced by the Fed.
Morgan Stanley says that fiscal, and not just monetary, policy has to play a part here too. If the Obama administration gets its way and unemployment benefits and the Social Security payroll tax cut are extended, that amounts to a stimulus of about 0.8% of GDP. If those measures our rejected, that’s an automatic fiscal tightening of 1.2% of GDP.
Bottom line, we’re still too weak to abandon the recovery, and the news out of Europe is still bleak. We don’t want to pull an ECB and possibly do damage to our recovery by tightening too early. It’s very likely that it would sink us back into recession.
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