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The Fed in the Yo-Yo Years
Over six years ago, even before the Lehman Brothers failure, ECRI showed how U.S. trend growth had been stair-stepping down in successive expansions since the 1970s. A key implication of that longstanding decline in trend growth was that cyclical slowdowns were increasingly likely to become recessions.
Fed Chairman Janet Yellen seems to agree our view. Answering a question from the IMF’s Christine Lagarde, Yellen observed that, because of lower trend growth, “A negative shock could push economies against the zero lower bound... I think we will have to worry about these episodes more often.”
So, given half a chance, the Fed wants to raise rates off of the zero-bound as soon as possible, ahead of the next such "episode.”
Neverthess, even with 5% GDP growth in Q3, sustained job growth and a windfall from gas prices falling, there’s still a strong suggestion that the Fed should wait beyond mid-year to have a rate hike. In essence, the view that rates should remain at zero, some seven years after hitting the zero lower bound, betrays an underlying worry about the economy's resilience.