Tim Duy, Columnist

This Expansion Will End in a Fizzle, Not a Bang

Concern about a collapse in asset prices will lead the Fed down the path of excessive tightening.

July 17, 2017 at 11:30 AM UTC

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

Equity prices are “somewhat rich.”
Photographer: Andrew Harrer/Bloomberg

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The Fed is growing increasingly concerned that this expansion will end like the last two, with a collapse in asset prices that brings down the economy. That concern will lead the central bank down the path of excessive tightening. Worse, that logic misses a key point. In both of the last two cycles, there was a sizable imbalance in the economy that extended beyond financial assets themselves. So far, the current environment lacks such an imbalance. That suggests the expansion ends with more of a fizzle than a bang.

Investment activity illustrates the lack of imbalances in the economy relative to the last two cycles. In both cases, climbing asset prices filtered through to the real economy in the form of a growing share of investment spending: