Joined: 28 Dec 2005
|Posted: Mon Feb 29, 2016 2:34 pm Post subject: Fed before Crisis
In addition to episodes during the zero-lower-bound regime, another period that stands out in their index is the “measured pace” of the Greenspan tightening of 2004-2005, in which the Fed telegraphed that it was planning to implement a 25-basis-point hike in the fed funds rate at every FOMC meeting. Although this approach was intended to reassure markets with the predictability of Fed actions, with hindsight it is clear to many of us that it was a mistake not to adapt monetary policy more quickly to the developing house price bubble.
U.S. annual per capita real GDP growth in 2004-06 was 2.04%, which is less than the 1982-07 average of 2.30%.
So, it seems, the tightening of 1/4 point at each meeting in 2004-06, from 1% to 5 1/4%, wasn’t a mistake.
I agree, the easing took place too quickly in 2008. However, that’s because the easing began too late.
One big problem was too much capital was directed into the housing market. It should’ve been redirected into tax cuts. So, households could pay-down and pay-off debt.
It seems, per capita real GDP growth slowed to less than 1% in 2007. And, the economy peaked in December 2007 – basically after a 25-year boom.