Moving Early

The Week Ahead

June 19, 2017

Every economic recession in the post-war era was helped, if not caused, by a monetary policy error in which central bankers sat on low interest rates for too long, only to raise them too rapidly and too aggressively to combat sneaking in inflation.

The 1990-91 recession and the housing crash in Ontario were probably helped by too rapid a hiking trajectory by then Governor John Crow.

Even the mother of all recessions was probably deepened by policy overshooting as Greenspan waited too long before he started hiking in June 2004. Note that back then, inflation was already on a clear acceleration path, with core PCE rising from 1.3% in September 2003 to 2% in June 2004. That is, the Fed waited for core inflation to reach today’s target before moving. By then it was clearly too late. When you chase a lagging indicator, you overshoot.

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