Analyst: Fed Has Created 'Yet Another Asset Bubble'
In a recent report, Societe Generale analyst Albert Edwards looked at the Federal Reserve’s track record when it comes to economic forecasts.
While the general consensus in the market seems to be that the Fed will raise interest rates sometime in the middle of 2015, Edwards questions the prudence of such a decision by the Fed.
The Bank for International Settlements (BIS) has a track record of pointing out the Federal Reserve’s (and other central banks’) inconsistent policy approach when it comes to booms and busts. Policy makers tend to ease aggressively during economic downturns, but do not do enough to prevent unhealthy asset bubbles from inflating.
Bias In Policy
As a result of these asymmetric policies, there has been a downward bias in interest rates over time and an upward bias in debt accumulation. Edwards believes that this behavior has put the U.S. economy in the precarious state it is in today.
“The simple fact is that the Fed has used and abused monetary policy to create yet another asset bubble in another misguided attempt to revive the real economy,” Edwards explains.
Edwards isn’t comfortable with the faith the general population seems to place in the Federal Reserve’s economic forecasting ability. The Fed’s track record is horrible when it comes to forecasting recessions, but the records of the ECB, OECD, IMF and private sector economists are no better, he added.
A recent study by Ahir and Loungani showed that the private sector and public sector have failed to accurately forecast a single recession since 1989.
The Bottom Line
Clearly, Edwards doesn’t believe that the Fed’s current rosy outlook for the U.S. economy is reliable.
Perhaps this quote from GMO Capital’s James Montier sums up Edward’s opinion best: “It isn’t just growth that economists can’t forecast; it’s also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.”
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