The way out of the Great Depression was neither smooth nor continuous. In 1937, the Fed tightened and the economy went back into recession. There is fear, in some quarters, that the Fed may again be putting on the brakes a bit prematurely.
As Matthew Boesler at Bloomberg reports:
The specter of 1937 is weighing on the minds of top Federal Reserve officials as they work on a road map for unwinding their unprecedented economic stimulus. That was the year, following a recovery from the Great Depression, that the Fed prematurely tightened monetary policy and was forced to backtrack as the economy fell back into a recession. The dangers of repeating that mistake are highlighted in a survey of the 22 primary dealers that trade U.S. Treasuries directly with the Fed. The dealers saw a 20 percent chance the Fed, which plans to raise its main interest rate in 2015, would be forced to cut it back to zero within two years, according to the median response to the poll, taken by the New York Fed before September’s Federal Open Market Committee meeting.
There are indications that the recovery may be accelerating. But there are also troubling developments, not least the signs that Germany may be going into recession.
Too soon to tell. Just as it may be too soon to tighten.
