Fire or ice?
When expansions end and the economy tips into recession, one or the other is usually to blame.
In the past, the culprit has frequently been fire — an overheating economy and rising inflation — that prompted the central bank to push up interest rates until they ultimately choked off growth. Ice is more unusual, at least in the United States, but often more painful, as excess capacity, weak demand and falling prices foster a deflationary slump that can prove difficult to escape.
As the Federal Reserve embarks on a new chapter in monetary policy, having raised rates on Dec. 16 for the first time in nearly a decade, policymakers are acutely aware of the risks posed by either possibility.
“Raising rates the first time may have been the easy part; now comes the challenging part,” said Mike Ryan, chief investment strategist for UBS Wealth Management Americas.
Fed officials do not have to look far for real-world examples of what can go wrong.
European central bankers raised rates twice in 2011, killing off a nascent recovery and plunging the eurozone into a double-dip recession that it is still struggling to overcome.
But being too slow to tighten the reins of monetary policy can prove perilous, too.[“source-indiatimes”]