angle-left null Economics and Markets Update: Into Thin Air

Economics and Markets Update: Into Thin Air

White Paper Macro & Market Active Fixed Income
November 2018
Economics and Markets Update: Into Thin Air

Authors and Contributors

The top of Mount Chimborazo in Ecuador is the point furthest away from the center of the earth. The German naturalist Alexander von Humboldt came just short of that peak in 1802, setting an altitude record that stood for thirty years, all the more remarkable without reliable charts in an era well before bottled oxygen. Federal Reserve (Fed) Chair Jay Powell is similarly leading the global economy into thin air. Is it possible to raise the targeted federal funds rate in the US so as to tighten financial conditions, slow real GDP growth back to trend (but not below), and limit the overshoot of inflation? Powell also lacks a reliable map of his destination, the neutral nominal federal funds rate, but seems committed to climb at the steady pace of one-quarter percentage point up every calendar quarter.

The top of Mount Chimborazo in Ecuador is the point furthest away from the center of the earth. The German naturalist Alexander von Humboldt came just short of that peak in 1802, setting an altitude record that stood for thirty years, all the more remarkable without reliable charts in an era well before bottled oxygen. Federal Reserve (Fed) Chair Jay Powell is similarly leading the global economy into thin air. Is it possible to raise the targeted federal funds rate in the US so as to tighten financial conditions, slow real GDP growth back to trend (but not below), and limit the overshoot of inflation? Powell also lacks a reliable map of his destination, the neutral nominal federal funds rate, but seems committed to climb at the steady pace of one-quarter percentage point up every calendar quarter.

His fellow travelers, us included, are already skittish about what can go wrong because the economic landscape is littered with the carcasses of expansions that ended badly in prior Fed attempts to scale the heights. Indeed, only one succeeded in the modern era of Fed communication, the Greenspan firming of 1994 to 1995. And even then, while the economy ploughed ahead, financial markets were extremely volatile.

At the time, US politics seemed especially divisive, marked by a then-record rejection of the incumbent president’s party in the midterm elections that gave "Contract with America" Republicans control of the House of Representatives. Debt-ceiling showdowns and government shutdowns ensued. The general feeling was that the political climate could not get worse.

How naive.

On January 31, 2018, The Boston Company and Standish merged into Mellon Capital to form a combined entity, BNY Mellon Asset Management North America Corporation. Effective January 2, 2019, this entity was renamed Mellon Investments Corporation.