In an article for The Wall Street Journal, co-authors Stanley Druckenmiller (chairman and CEO of Duquesne Family Office LLC) and former Federal Reserve Board member Kevin Warsh argue that the Fed should suspend its “double-barreled blitz of higher interest rates and tighten liquidity.”
“The Fed created quantitative easing as a novel crisis-response tool a decade ago,” the article explains. “It bought assets from the public and stocked them away for safekeeping. Market participants understood the not-so subtle message: The Fed had investors’ backs. The stock market rallied. The cost of credit fell. And the business and financial cycles charged ahead.”
But while the financial crisis ended in early 2010, the article argues that the Fed’s asset purchases continued, and other large central banks followed suit. Quantitative easing, it points out, has since been replaced by global quantitative tightening. “True, the Fed had begun to taper its balance-sheet holdings 15 months earlier, that was more than offset by other central banks’ still-growing asset purchases.” Now, as we begin a new year, the article says that the tightening is expected to pick up, accompanied by further interest rate increases from the Fed, and that “the timing could scarcely be worse.”
Economic growth outside the U.S., the article argues, decelerated in the last quarter of 2018 and global trade has slowed considerably. “No ocean is large enough to insulate the U.S. economy from slowdowns abroad. And no forecasting model adequately captures the spillovers and spillbacks between the U.S. economy and the rest of the world.” The article adds that U.S. financial market indicators are also signaling caution, with bank stocks down and the housing, transport and industrial sectors showing double-digit dips.
The article suggests that the new Fed leadership faces a formidable challenge and should “worry less about fine-tuning its communications strategy and more about getting policy right.”
“The time to be dovish was when the crisis struck, and the economy needed extraordinary monetary accommodation,” the article concludes. “The time to be more hawkish was earlier in this decade, when the economic cycle had a long runway, the global economy ample momentum, and the future considerably more promise than peril. This is a time for choosing. We believe the U.S. economy can sustain strong performance next year, but it can ill afford a major policy error, either from the Fed or the rest of the administration.”