Fed Must Tune in to Changing US Economy

February 21, 2013

In our view, a successful monetary policy must ensure that wealth gains from rising asset prices are durable and linked to fundamental changes in the real economy—not just a temporary benefit from artificial and unsustainable liquidity flows.
-Joseph G. Carson, head of global economic research, AllianceBernstein

With each passing month, more questions are being asked about the sluggish US economic recovery. Why has growth been subdued since the recession ended in mid-2009? What’s changed in the economy? How long can loose monetary policies persist before promoting more inflation or creating a new bubble?

To answer these questions, you first need to understand what is driving the US business cycle. In the initial stages of the last three US economic recoveries (1991, 2001 and 2009), the pace of growth was roughly half as fast as during recoveries from the 1960s to the 1980s (Display). In the past, it was widely believed that deep recessions were followed by sharp recoveries, while mild, short downturns were followed by weaker rebounds.

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