The "recession mantra"

During the month of January, we heard the word “recession” quite a bit. Just google “US recession in 2016” for a sample.

Maybe the Fed´s blunder in raising the Fed Funds rate in December 2016 was the “sentiment trigger”. As Narayana Kocherlakota said recently:

The FOMC’s current policy framework goes back to at least mid-2013. It can be defined by two key words gradual and normalization. Both words refer to the level of monetary accommodation. In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to mean about four increases of a quarter percentage point. The word “normalization” is generally interpreted to mean “returning to about 3.5 percent”.

To be fair: the evolution of the macroeconomy does enter into this framework. But it only matters to the extent that it might lead the FOMC might tweak the pace of interest rate increases up or down. The main mission is still defined by those two key words: gradual and normalization.

If the FOMC does not alter its monetary policy framework from one geared to targeting the level and volatility of interest rates to a goal oriented framework, monetary policy will fail in its role of stabilizing the system.

The December rate action was just the latest indication of monetary tightening, which began in earnest in June 2014, when the Fed made clear that asset purchases would end on schedule. Since that time, almost all economic activity and economic sentiment indicators have been pointing to a weakening economy.

Our preferred measure of the stance of monetary policy, the growth rate of NGDP, is quite clear on that score:




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