Outgoing Fed Chair Warns of “Boom-Bust Cycle”

Dec 07, 2017 No Comments by

In an ironic twist, Janet Yellen—who officially will not have her term renewed as Fed chair— gave a recent talk at New York University in which she warned that the U.S. central bank would need to be careful with its interest rate policy in the coming years.

According to a Nov. 21 article from the AP, Yellen said that “going forward, the Fed will be faced with a delicate balancing act: It will need to move rates up at a pace that allows the labor market to improve and inflation to move toward the Fed ’s target. This while not delaying hikes to the point where the Fed is forced to push rates up so quickly that it threatens to throw the country into recession.

This all sounds great in theory, but remember that the Fed (under Alan Greenspan) also tried to engage in a “soft landing” following the stimulus it had given to the economy after the dot-com crash. Specifically, the Fed had cut its policy rate from 6.5% down to 1% by June 2003, and held it there for a year. Then, starting in June 2004, the Fed began frequent but modest hikes, in an attempt to “take its foot off the gas” without crashing the economy. We all know how that balancing act turned out.

If the Austrians are right about the business cycle, there is no way to avoid a crash. Artificially low interest rates—in place for seven years—invited massive misallocation of resources, such that the capital structure of the economy is in an unsustainable configuration. By slooooooowly letting interest rates return to more appropriate levels, the Fed may postpone the day of reckoning, but it will only prolong the period of illusory prosperity and make the crash that much worse when it happens.


Julie Ann Hepburn, National Private Client Group – Lara-Murphy Report

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About the author

Julie Ann Hepburn, is a Private Banking Expert and Financial Coach. She is the founder and principal of National Private Client Group, LLC , a Chicago based financial consulting group. Ms. Hepburn is a licensed finance professional, and serves as an agent and consultant for several major mutual insurance carriers. For full bio, please see: http://nationalprivate.com/bio.html
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