The Fed’s 'First, Do No Harm' Policy Is Harmful

The sharp “risk-on” rally in financial markets this year strongly suggests that the U.S. economy has been inoculated against recession risk by the Federal Reserve’s dovish pivot. This reasoning, however, ignores two notable concerns. First, the cyclical slowdown in growth that precipitated the plunge in stocks in the fourth quarter isn't about to end. Second, everyone seems to have forgotten that monetary policy impacts economic growth and inflation with "long and variable lags."

History has shown that the odds of a soft landing go up only if the Fed is preemptive in cutting interest rates, as opposed to simply hitting the rate-hike pause button. All the central bank has really done by saying it’s willing to be patient when it comes to future rate increases is recognize the reality of slower growth and inflation after stock prices and government bond yields plunged.