Salient to Investors:

  • Michael Gapen at Barclays Capital said the late 1990s was a very good period for the US economy, with Greenspan making the correct call on monetary policy; but the general consensus is that Fed policy in the run-up to the housing bust prior to the 2007-2009 recession was incorrect. Gapen said there may be global disinflationary trends.
  • James Bullard at FRB St. Louis said the 2004 to 2006 tightening cycle was so mechanical and predictable that it fostered asset-price bubbles.
  • William C. Dudley at FRB New York believes it might be necessary to raise inflation to the Fed’s 2% target by letting the economy run hot for a while to push inflation back up to the Fed’s objective. Dudley cites a sea change in the way the Fed now thinks about asset bubbles: it now tries to identify asset bubbles in real-time instead of, under Greenspan, believing they are unpredictable and so waiting until they burst and then cleaning up afterwards.
  • Tobias Adrian at FRB New York and Nellie Liang at the Fed warned that accommodative monetary policy could contribute to the buildup of financial vulnerabilities and hence increase risks to financial stability.
  • Michael Feroli at JPMorgan Chase said Yellen suggested earlier this month that she would not emulate Greenspan’s methodical approach to raising interest rates.
  • Richard Clarida at Pimco said the Fed will try to thread the needle by wanting a gradual pace of rate hikes, while not wanting people to get too relaxed as they did with measured pace.

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