Fed could worsen the next recession with a July rate cut, says Mizuho economist

Lax Fed may be setting stage for a deeper recession, critics say

By: JEFFRYBARTASH

Some argue the Federal Reserve risks exacerbating any coming economic slowdown by keeping interest rates excessively low.

Steve Ricchiuto, the U.S. chief economist of Mizuho Americas, is one of those critics. He contends that the Fed would make a big mistake if it cuts already-low interest rates at the conclusion of its two-day policy gathering July 31 as widely expected.

The central bank has expressed anxieties about U.S.-China trade tensions and other headwinds could threaten an economy in a record-setting 11th year of expansion. The Fed is ready to trim rates even though layoffs and unemployment stand near a 50-year low.

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Stubbornly low inflation, hovering below an annual target of 2%, is no longer the Fed’s biggest bugaboo, he said, and it hasn’t been for several decades. The problem is the quality of credit and the health of U.S. financial institutions.

Also read: The last time inflation ran consistently above 3% was 26 years ago

Ricchiuto argues the last three recessions in 1990-91, 2000-2001 and 2007-2009 stemmed from credit bubbles that the Fed inadvertently helped to form through lax monetary policy. It’s about to repeat that mistake again, he said.

A rate cut “will incite undesired risk taking by borrowers and deepen the next recession, which will unnecessarily increase the cost to society,” Ricchiuto told clients in a new research note.

Recessions are becoming deeper, he said, and the economy is taking longer to recover.

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The argument by Ricchiuto is a variant of a longstanding view that recessions can be cleansing for an economy by ridding it of dangerous excesses that build up during an expansion.

Few are arguing in favor of companies failing, a la Lehman Brothers in 2008. But proponents of normalizing monetary policy say that raising rates may have a cathartic effect, giving the economy a clean slate by deflating potential credit and other bubbles that have formed in an environment of ultralow interest rates.

For instance, some see the soaring stock market DJIA, +0.22% SPX, +0.17%  peaking a fresh record highs as a direct byproduct of easy money.

Read more at MarketWatch.com

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