Fed's Rosengren: Now Is The Time To Prepare For The Next Recession

Thanks to the Trump fiscal stimulus, the economy may be decoupling from the rest of the world (at the cost of what the CBO described as a "catastrophic" debt load in the not too distant future) and growing at a torrid pace, at least until the fiscal stimulus fades, but according to at least one Fed president, now is the time to start preparing for the next recession.

Speaking at the Peterson Institute for International Economics in Washington, Boston Fed president Eric Rosengren said that fiscal, regulatory and monetary policy makers should take a variety of actions to make periods of high unemployment less likely. In his prepared remarks, he said that high unemployment periods disproportionately affect minorities, people with lower education levels and children.

Specifically addressing the next economic downturn, Rosengren said that In the U.S., state and local government financing “should be designed to buffer the economy during recessions." Quoted by Bloomberg, Rosengren said that such steps could include reducing the reliance on pro-cyclical revenue sources, shoring up pension liabilities and increasing “rainy-day funds” during economic upturns.

He also said that the Fed should increase the counter-cyclical capital buffer required for large banks to "address the incentive that banks will have to pull back on lending to shrink assets in a future economic downturn" and that the Fed should also consider "more flexibility with the inflation target" in order to give the central bank more room to lower interest rates during the next recession.

This goes back to the age old argument whether the Fed will overheat the economy, and hike too high just so it can cut enough to stem the next recession. Rosengren's view: "I think the policy path that will increase the probability of a longer recession-free period is the path where the economy does not run above capacity and thus, fall far below the sustainable unemployment rate."

Then, during the Q&A he made the following comments:

  • *ROSENGREN: THERE ARE SOME REAL BENEFITS TO MOVING GRADUALLY
  • *ROSENGREN: MUST WATCH IF INFLATION PICKING UP MORE THAN THOUGHT
  • *ROSENGREN: HAVE NOT SEE WAGES GO UP VERY RAPIDLY YET
  • *ROSENGREN: CAN TAKE BIT MORE RISK IF EXPECTATIONS WELL ANCHORED

This may well be the warning shot that the Fed's 2018 (and 2019) dots are about to come crashing down, as the recent forecast of 2 more rates hikes in 2018 is slowly but surely shifted to 1 or even 0. Keep in mind, the market is now only expecting a grand total of 2-3 more rate hikes before the Fed calls it a day, and starts to truly prepare for the next recession.

Now if only stocks were to get the memo...