Interesting article in Business Week: Relax and Enjoy the “Greenspan Lag”
EXCERPT: The Fed chief has a history of waiting until the last minute before hiking rates, and it’s still a long way from that point
With the cyclical turn in the labor market behind it, the next big milestone for bonds will be the shift in course for Federal Reserve policy. At MMS, we expect Chairman Alan Greenspan to reveal his historic tendency to take longer to initiate a round of interest-rate hikes than most monetary-policy hawks would like — but to then raise rates more, and faster, than expected.
Greenspan waited until 1994 to start the tightening cycle after the 1990-91 recession. But he was able to launch it with a “surprise tightening,” and then proceeded to raise rates so severely that the economy was nearly pushed into a premature recession. Similarly, the chairman has been blamed for fueling the global financial market bubbles with only one small tightening through the 1996-97 boom, bracketed by glowing assessments of the “New Economy,” despite widespread calls for more significant rate hikes.
The ensuing four years were spent in mop-up operations around global financial market “bubble burstings” that might have been smaller had they been contained in advance . . .
Relax and Enjoy the “Greenspan Lag”
Michael Englund (chief economist for MMS International)
ECONOMIC INSIGHT, NOVEMBER 13, 2003