Fed Remains Wary of Asset Prices and Financial Conditions Causing Next US Recession
The Federal Open Market Committee (FOMC) is wary about fully embracing a brand new monetary transmission mechanism, as testified by a depressed velocity of circulation of money. Weak money velocity raises the risks of policy settings remaining too accommodative, particularly if inflation begins, as expected, to rise at some future point.
Financial conditions will have a major bearing on Fed policy conduct due to their impact on the real economy, exchange rate and risk-taking in the financial system. The Fed is reluctant to ditch current forward guidance fearing further froth in financial markets and excessive risk-taking.
The Fed could commence balance sheet reduction at September’s FOMC gathering. Lingering fiscal policy matters, notably raising the debt ceiling, could impact the FOMC’s plans due to dysfunctionality in the US Treasury market.
Falling asset prices, as opposed to rising inflation, have caused the past two US recessions by producing large declines in investment from prior excesses. There is little evidence of high asset prices producing investment imbalances in the current cycle.
The events of the late-1980s could provide a template for the current cycle, whereby Fed policy was tightened too quickly and subsequently eased too cautiously in the wake of unfolding weakness in the real economy.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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