The Fed consistently makes a mistake with interest rates in the lead up to recessions — and there’s clear evidence that it just happened again

Federal Reserve Board Chair Jerome Powell talks with Carlyle Group co-CEO David Rubenstein during the Economic Club of Washington luncheon, in Washington, Thursday, Jan. 10, 2019.It's something that the central bank consistently does ahead of recessions.I find this discussion about the Fed's neutral policy rate to be as interesting as the debate over the yield curve. But they are pertinent to the view that the Fed, yet again, went too far this cycle.

At his Senate confirmation hearing on November 28th, 2017, he said"it's time for us to be normalizing interest rates." On December 19, and in the middle of a market meltdown, he raises rates, says there are two more hikes in the chamber for 2019 and says the balance sheet unwind is on"autopilot." Oops!

It was illuminating because she emphasized that there are two"neutral" rates — one for the long-term, which the Fed publishes forecasts on, and a"shorter-run" rate —"this does not stay fixed, but rather fluctuates along with important changes in economic conditions.""In many circumstances, monetary policy can help keep the economy on its sustainable path at full employment by adjusting the policy rate to reflect movements in the shorter-run neutral rate.

But the shorter-run neutral rate, rather than the longer-run federal funds rate, is the relevant benchmark for assessing ‎the near-term path of monetary policy in the presence of headwinds or tailwinds."

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