Its 121-month expansion won’t last forever but what could bring on a downturn?by Barry Eichengreen / July 5, 2019 / Leave a comment
The US economy has now expanded for 121 consecutive months, making the current upswing the longest in the country’s history. There are two potential explanations. To a few exuberant observers, this landmark indicates that we have entered a new era in which downturns are a thing of the past. Actually, Australia and not the US epitomises this possibility. The “Lucky Country” is currently experiencing its 28th consecutive year of economic growth.
A more sceptical view is that the US expansion reflects good luck rather than good policy. This luck starts with relatively stable oil prices. It includes the fact that home prices haven’t soared as in 2001-07, when they set the stage for the subsequent crash. US banks remain cautious about taking risks, so there have been no major bank failures to interrupt the expansion. These last developments may reflect the not-so-happy fact that this expansion occurred in the wake of a sobering financial crisis. But they have been stabilising nonetheless.
Finally—and what I want to pay most attention to—the current expansion hasn’t been choked off by higher interest rates. Scholars agree that US expansions die not of old age but by Federal Reserve action. Concerned about accelerating inflation, the Fed tightens. Asset prices and investment weaken in response, and recession eventually follows. This time is different, to coin a phrase. For this there are three potential explanations: good policy, good luck, and Donald Trump. Good policy means that Fed officials now realise that past expansions were killed off by the central bank’s own malfeasance. That a substantial number of Federal Open Market Committee (FOMC) members have academic credentials means that more of them are aware of scholarship documenting this fact.
This, of course, could be attributing undue influence to “academic scribblers.” The main factor behind the Fed’s reluctance to tighten, it can be argued, is, rather, Donald Trump. Trump is a “low-interest-rate person.” His critical tweets are designed to pressure the Fed to reduce interest rates. Whether they have had any such effect is dubious, however. In practice, the FOMC is as likely to raise rates to assert its independence as it is to lower them to avoid Trump’s criticism. On balance, it is unlikely to do either.
The good-luck interpretation is that the Fed has been blessed, for mysterious reasons, by subdued inflation.…