FED to create firewall to contain downturn

LONDON. – Like booms, recessions help individuals and businesses make sense of changes in the level of economic activity and drive those changes with their impact on spending and savings.

As the world economy slows, the US Federal Reserve is now openly discussing an interest rate cut designed to ensure a recessionary narrative does not take root and to keep the economy expanding.

“A recession . . . is a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, to postpone starting a new business, to postpone hiring new help in an existing business, or to express support for fiscally conservative government,” Yale economist Robert Shiller told the American Economic Association (“Narrative economics”, Shiller, 2017).

Disturbances that spark a downturn can vary. Bank failures, poor harvests, earthquakes, stock market crashes, real estate busts, post-war demobilisations and monetary policy mistakes have all been blamed for initiating recessions (“The Panic of 1907: Lessons from the Market’s Perfect Storm”, Bruner, 2007).

The initial disturbance need not be major but it spreads through the economy and is amplified by the existence of positive feedback as households, businesses and financial intermediaries all try to reduce risk exposure at the same time(“General Theory of Employment, Interest and Money”, Keynes, 1936).

If policymakers want to avoid recession, they must avert the initial disturbance through regulation or prevent it propagating and accelerating through the system.

Recessions are caused not so much by the initial disturbance as by the second and third-round responses to it by individuals, firms, banks and governments. Tempering those reactions is normally the priority for policymakers. -Reuters.

Source : The Herald

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