Markets Confront Death by a Thousand Cuts

Stocks have been on a wild ride, with the Dow Jones Industrial Average dropping 10.4 percent from its peak on Jan. 26 to the Feb. 8 trough, before recovering about half those losses through Thursday. Usually, big declines foreshadow Federal Reserve-induced recessions. Late in a business cycle, the central bank worries about economic overheating and jacks up interest rates to crushing levels.

That wasn't the case during the dot-com bubble in the late 1990s, when the Fed belatedly boosted the federal funds rate from 4.75 percent to 6.50 percent between June 1999 and May 2000. Similarly, central bankers waited too long to raise rates despite clear housing-market excesses in the early 2000s that enabled the subprime mortgage boom, which precipitated the financial crisis and the 2007-2009 recession. At the time, the rate increases didn't start until mid-2004, rising slowly in quarter-point increments from 1 percent to 5.25 percent in mid-2006. It was too little, too late.