U.S. central bankers are on a precarious economic path, a well-respected analyst warns.
One wrong move, and the economy and recent bull stock market will come crashing down after grinding to a halt.
A fiscal stimulus now would stoke inflation, crash the markets and cause a recession, Michael Ivanovitch writes for CNBC.com
The government and policy makes must be careful to balance rising wages and economic stability without cutting into corporate profits.
“It is easy to imagine what would happen if large personal and corporate tax cuts were unloaded in an economy that is already growing well above its noninflationary potential,” wrote Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy.
“Businesses would then move to raise prices to protect their profit margins, setting in motion the proverbial wage-price spiral as the fiscal stimulus and low credit costs continued to support household consumption, and residential and fixed investments,” wrote Ivanovitch, who served as a senior economist at the OECD in Paris.
“The Federal Reserve, of course, would be in on the act at some point in that process, first proceeding carefully and gradually to avoid crashing equity markets — until it became clear that gentle gradualism would have to give way to a strong and prolonged credit tightening,” wrote Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy.
“We would then have the entry point into a recession of unpredictable amplitude and duration,” wrote Ivanovitch, who taught economics at Columbia Business School.
“The best solutions for a stronger and steadier long-term growth would be to use fiscal, structural and foreign trade policies to relieve and remove the physical limits to a faster noninflationary economic activity,” wrote Ivanovitch.
“Tax cuts to boost aggregate demand — under present cyclical conditions — would lead to sharply rising interest rates and falling bond and equity prices,” wrote Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy.
However, one U.S. central banker isn't worried about recession.
The risk of a U.S. recession is “very low” in the near term so the Federal Reserve will likely continue to raise interest rates gradually over “the next few years,” New York Fed President William Dudley said last month.
“By the time that the next recession hits interest rates will be considerably higher than what they are, so I think we’ll have more room” to cut rates in response, he said, Reuters reported.
Dudley added that the economy is “at a good place” for the central bank to start shedding bonds.
(Newsmax wires services contributed to this report).
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