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The Fed, Debt, and the Economy


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28 minutes ago, tommyGunZ said:

Explain Obama and the Democrats role in QE please.  

Your act is pretty funny. That’s fine, works both way and he deserves no credit for ending the recession then? Maybe someone else nominated Fed chair? 

 

Actually maybe you could blame any short comings from his terms on Trump too?:lmao:

 

 

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Pretty crazy how 99% of this country splitting up 17% of the total tax benefit from the tax cuts isn't really working out.  I mean we tried to dumb down the math to make it more digestible and easier to understand.  Not sure how it got misinterpreted.  

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13 minutes ago, Juxtatarot said:

Ben Bernanke?

Ben has been great for our portfolios but the excessive QE at the end was one big kick of the can down the road, do you not agree? If we want to deflect it away from Obama even though he nominated him again and this occurred on his watch that’s fine although if the tables were turned it wouldn’t be handled the same. Regardless, we have a unique asset bubble due to this “recovery” that wasn’t a recovery but fake euphoria from the excessive QE. 

At some point the bubble has to burst.....is tax reform really the right move...who knows. Who has ever had to unwind something like this? Hint: no one. 

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15 minutes ago, GoBirds said:

Who has ever had to unwind something like this? Hint: no one. 

And there are no plans to.  The hope is that we grow into the deficit and eat it that way.  The debt gets inflated away.  

Really no different than what Bernanke hoped to do during his tenure (though it turns out he was fighting significant deflation at the time and never managed to get inflation up to targets).

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25 minutes ago, Sand said:

And there are no plans to.  The hope is that we grow into the deficit and eat it that way.  The debt gets inflated away.  

Really?  I thought the Fed had already begun the process of unwinding?  https://www.reuters.com/article/us-usa-fed-politics-bonds/shrinking-balance-sheet-may-protect-federal-reserve-from-losses-and-political-criticism-fed-study-idUSKBN1EY01W

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1 hour ago, tommyGunZ said:

Unwinding is a separate process, and though deflationary they're more than countering it with increasing the headline interest rate.  That doesn't change the overall mechanics of increasing GDP to outgrow the deficit or inflating away debt.

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9 minutes ago, The Z Machine said:

Man, it's gonna be great when inflation ratchets up but wages stay stagnant.

What, all these companies received their tax breaks and are going to share it with their workers!!

 

:lmao:

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4 hours ago, Sand said:

Unwinding is a separate process, and though deflationary they're more than countering it with increasing the headline interest rate.  That doesn't change the overall mechanics of increasing GDP to outgrow the deficit or inflating away debt.

Decreasing the size of the balance sheet is synonymous with unwinding.

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@RedmondLonghorn I am wondering your opinions on the use of traditional economic theories based in the "gold standard" sort of economy in the faith/confidence based economy we now live in.  At just about every turn it seems those traditional theories are becoming less and less true yet some continue to rely on them as their economic Bible essentially.  

The recent discussion about the crisis of 2008 got me thinking about this.  If we're being honest with ourselves, it feels like there was no real precedent for what happened, nor was there a blue print for coming out of it.  It feels like this event will end up being the baseline for similar events going forward that we compare them to.  I can't find an instance in our history where the circumstances matched very closely to the 2008 incident for comparison in determining "yeah, we did a good job coming out" or "we really screwed that up".  Obviously, any opinions I see are generally along party lines and are rather predictable in terms of the Monday Morning QBing narrative, but I'm really wondering if the basis for those is valid anymore.

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Reading this thread really makes me realize I’m not very intelligent :angry:

You guys are saying the Fed is trying to drive up inflation and unwinding the debt. Can you help out a guy like me by explaining how this works? Just a sentence or two. And maybe throw in an analogy consisting of puppies or something.

TIA

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29 minutes ago, Jobber said:

Reading this thread really makes me realize I’m not very intelligent :angry:

You guys are saying the Fed is trying to drive up inflation and unwinding the debt. Can you help out a guy like me by explaining how this works? Just a sentence or two. And maybe throw in an analogy consisting of puppies or something.

TIA

The Fed can do two things: change baseline interest rates (the rate they charge banks to deposit money with them, aka "fed rate"), and they can buy or sell assets (money supply, aka quantitative easing / quantitative tightening). The Fed has a dual mandate of keeping inflation near a set target and keeping unemployment low. They seek to hit their dual mandate by the two actions described above.

They cannot directly manipulate the debt held by the US Gov't, but since they can (try to) manipulate inflation, they have the power to "inflate away" this debt by making the dollar but less stuff, i.e. making the debt less valuable.

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24 minutes ago, Jobber said:

Reading this thread really makes me realize I’m not very intelligent :angry:

You guys are saying the Fed is trying to drive up inflation and unwinding the debt. Can you help out a guy like me by explaining how this works? Just a sentence or two. And maybe throw in an analogy consisting of puppies or something.

TIA

I wouldn't go as far as to say the Fed is TRYING to drive up inflation.  As a matter of fact, it was quite the opposite. If they were trying to drive up inflation they would have increased interest rates way faster than they did.  There are some who think it took too long to come out of the recession.  It lasted about 18 months.  There are some who argue that the length of time was necessary given the dire straits we were in.  The truth is, we've never faced a crisis this large, impacting this specific industry in the modern "faith/confidence" based economy this way.  There really wasn't a good "how to" set of rules on this one.  I guess the battle was between "rip the bandaid off and let the heeling begin" and "pull the bandaid off slowly in hopes that the wound is heeled when the removal process is complete".

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8 hours ago, RedmondLonghorn said:
13 hours ago, Sand said:

Unwinding is a separate process, and though deflationary they're more than countering it with increasing the headline interest rate.  That doesn't change the overall mechanics of increasing GDP to outgrow the deficit or inflating away debt.

Decreasing the size of the balance sheet is synonymous with unwinding.

It is a nitpick, but I feel unwinding implies a more active than passive process.  Just a connotation thing.  When I see it used it seems like the person is talking about actively selling off securities. 

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3 hours ago, The Commish said:

I wouldn't go as far as to say the Fed is TRYING to drive up inflation.  As a matter of fact, it was quite the opposite. If they were trying to drive up inflation they would have increased interest rates way faster than they did.  There are some who think it took too long to come out of the recession.  It lasted about 18 months.  There are some who argue that the length of time was necessary given the dire straits we were in.  The truth is, we've never faced a crisis this large, impacting this specific industry in the modern "faith/confidence" based economy this way.  There really wasn't a good "how to" set of rules on this one.  I guess the battle was between "rip the bandaid off and let the heeling begin" and "pull the bandaid off slowly in hopes that the wound is heeled when the removal process is complete".

Isn't it the opposite?

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1 minute ago, tommyGunZ said:

Isn't it the opposite?

Normally, yes.  We need to remember that we were also flooding the economy with cash via the Fed loans "propping up" the financial institutions.  This seemed to be a bit of an offset to interest rates allowing them to stay low.  People like to forget that part, but it really was a unique situation.  Those loans from the Fed weren't funds that are normally available to the economy at large.

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26 minutes ago, The Commish said:

Normally, yes.  We need to remember that we were also flooding the economy with cash via the Fed loans "propping up" the financial institutions.  This seemed to be a bit of an offset to interest rates allowing them to stay low.  People like to forget that part, but it really was a unique situation.  Those loans from the Fed weren't funds that are normally available to the economy at large.

I still don't get this.  To clarify, you're saying that the Fed left rates extremely low for deflationary purposes?  

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5 hours ago, The Commish said:

@RedmondLonghorn I am wondering your opinions on the use of traditional economic theories based in the "gold standard" sort of economy in the faith/confidence based economy we now live in.  At just about every turn it seems those traditional theories are becoming less and less true yet some continue to rely on them as their economic Bible essentially.  

The recent discussion about the crisis of 2008 got me thinking about this.  If we're being honest with ourselves, it feels like there was no real precedent for what happened, nor was there a blue print for coming out of it.  It feels like this event will end up being the baseline for similar events going forward that we compare them to.  I can't find an instance in our history where the circumstances matched very closely to the 2008 incident for comparison in determining "yeah, we did a good job coming out" or "we really screwed that up".  Obviously, any opinions I see are generally along party lines and are rather predictable in terms of the Monday Morning QBing narrative, but I'm really wondering if the basis for those is valid anymore.

I think the LTCM bailout set a precedent for how we handled 2008.  One of my biggest fears is that financial institutions know they are now protected from failure so they place larger wagers seeking short-term returns.  It's like going to Vegas knowing that if you lose all your money the casino will just give it back to you at the end of your stay.

Granted LTCM was nowhere near the scale of 2008, but both events had the Fed worried about a total collapse of the financial markets.  In theory I think the bailouts were bad ideas, but I'm nowhere near smart enough to fully comprehend how it would have rippled through society had they not happened.  I don't think we'll really know the answer whether they were good or bad ideas for a long time.  

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3 hours ago, The Commish said:

I wouldn't go as far as to say the Fed is TRYING to drive up inflation. 

The Fed (in general) has a 2% inflation target.  Over the last decade they've really had no luck trying to drive inflation up - deflationary forces effectively counteracted ZIRP.  The economy being in full swing now has changed that a bit.

So I'd disagree a bit in that in the medium term history the Fed was absolutely trying to drive inflation (with is typically correlated with growth) up.  

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4 minutes ago, Sand said:

The Fed (in general) has a 2% inflation target.  Over the last decade they've really had no luck trying to drive inflation up - deflationary forces effectively counteracted ZIRP.  The economy being in full swing now has changed that a bit.

So I'd disagree a bit in that in the medium term history the Fed was absolutely trying to drive inflation (with is typically correlated with growth) up.  

I didn't mean to suggest they were trying to drive inflation one way or the other.  I don't think that was their concern at least not a primary one.  They weren't going to be able to drive up inflation with all the extra money floating around.  Perhaps those are the sorts of things you are referring to when you say "deflationary forces" ? 

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On 5/2/2018 at 0:44 PM, Sand said:

The Fed (in general) has a 2% inflation target.  Over the last decade they've really had no luck trying to drive inflation up - deflationary forces effectively counteracted ZIRP.  The economy being in full swing now has changed that a bit.

So I'd disagree a bit in that in the medium term history the Fed was absolutely trying to drive inflation (with is typically correlated with growth) up.  

Inflation will never happen with production high and wages stagnant.

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  • 7 months later...

The Fed Needs a Little Push From the Data for a Pause

One of the reasons for the turmoil in markets this week was that the Federal Reserve was deemed to be not dovish enough in its outlook, seeming to ignore the weakness in equities and other so-called risk assets. To be sure, the Fed will eventually yield and deliver a bigger dose of dovishness, but as we are witnessing now it won’t go down without a fight. 

The bar to an extended pause in the pace of interest-rate increases falls every day markets struggle. Indeed, comments Friday by New York Federal Reserve President John Williams make clear that the recent turmoil on Wall Street has not gone unnoticed.

Central bankers behaved this week much as I anticipated a month ago. Despite a sustained and substantial drop in equities, the Fed followed through with their intention to continue tightening monetary policy with Wednesday’s 25 basis-point rate hike. Moreover, they are for the time being sticking to their models, which call for further rate increases over the next couple of years until they reach a level that restrains economic activity.

That said, I anticipate the Fed will in the weeks ahead be forced to address that anxiety shown by investors, much like Williams attempted do on Friday. There is a good chance the Fed will soon take itself off the table for an extended period. It just needs a little push from the data to do it.

So how do we get there? The starting point to that conversation is recognizing that the Fed more likely than not made an error by boosting rates this month. Growth is slowing and inflation remains low while downside uncertainty is on the rise. While the Fed resists reacting to financial markets, the reality is that the downdraft in equities has gone on long enough to warrant additional caution. There is also plenty to worry about on the international side of the equation, from China to Brexit. And finally, policy uncertainty only increases with each passing day of the Trump administration.

There was plenty of reason to shift to a risk management mode at this week’s meeting and take a pass while giving a nod to a January hike. Indeed, the move felt much like the December 2015 rate increase, which also came amidst mounting financial and economic pressures. They both appeared to be model-driven hikes not warranted by the shifting balance of risks.

Hence, I think the Fed has, like in 2015, pushed up against the boundary of appropriate financial conditions. They are now at the edge of neutral in an unstable financial, economic, and political environment. If I am correct and the December hike was an error, they will soon recognize that error via the continued stress on financial markets. 

The Fed has already signaled a willingness to give more weight to market developments in future meetings. They added a sentence to the recent Federal Open Market Committee statement that they will be monitoring global and economic and financial developments, a point emphasized by Williams in his CNBC interview. Williams also tried to sooth nervous investors by noting that central bankers are “listening” to markets. Overall, I think they are primed to shift to a more dovish position and all they need is some further softening of the data to push them to the sidelines. 

Previously, I discussed some potential data outcomes that would induce the Fed to skip a March hike. Eventually they will realize they need to cushion not just the markets, but also the economy, against the growing uncertainty. With policy near neutral, the continued floundering of financial markets thus only lowers the bar for a pause.

The Fed tends to resist changing course, but when it does change, the shift occurs quickly. Watch for the Fed to stick to its guns and assert more rate hikes are coming, but shift to a more dovish position rapidly when the data softens a notch. That will be good. It’s the key to extending this expansion. This holds true as long as inflation remains under control. If the Fed starts fearing inflation as a more real than imagined threat, they will delay turning dovish. That’s when the game changes in a way that would send markets on an even more volatile path.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Tim Duy at duy@uoregon.edu

To contact the editor responsible for this story:
Robert Burgess at bburgess@bloomberg.net

https://www.bloomberg.com/opinion/articles/2018-12-21/the-feed-needs-to-acknowledge-the-market-turmoil

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3 hours ago, Slapdash said:

I think the Fed has hiked too much and believe they will pause for a while.  They are also in a dangerous place politically with Trump's remarks as well.  This shouldn't factor in, but it will.

That is an inherent problem with the federal reserve, they are first and foremost bankers who see things towards the interests of the banks. 

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3 minutes ago, bananafish said:

I miss @RedmondLonghorn and the economics talk, especially with all the bluster that abounds.

Hopefully this is just Mnuchin jumping when Trump yells “do something (which is a problem in itself), but in general it’s not good when the Treasury Sec does something like this from the golf course in Cabo. 

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17 hours ago, NREC34 said:

Steve Mnuchin reportedly called the CEOs of the largest US banks to check liquidity and calm the market. May have the opposite effect. 

link

So weird how having the treasury secretary personally call and check on liquidity with banks would make people a little worried. 

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I'm open to the possibility that targeting a 2% inflation rate, low unemployment, or price stability might be the best macroeconomic strategy.  I don't think it is best for the regular workaday individual, clearly, but I confess to not understanding the system as well as the econ wizards.  

But it seems fundamentally wrong to effectively grant the federal reserve a monopoly on the currency.  There should be multiple competing currencies legalized, people should be paid in and allowed to settle debts in any currency they like.  Gold/silver should really be treated like money for people who wish to use it that way.  People should be allowed to opt out of this system instead of going down with the ship. It seems doubtful that the reason it does not work like this is for our own economic wellbeing. 

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On 12/23/2018 at 1:45 PM, Slapdash said:

I think the Fed has hiked too much and believe they will pause for a while.  They are also in a dangerous place politically with Trump's remarks as well.  This shouldn't factor in, but it will.

We’re at 2.5%, we shouldn’t act like that is Armageddon, yet here we are. Clearly debt is a huge issue when 2.5% and the threat of 3% is causing a panic. Is it possible the policy error started with Janet keeping us on zero for too long? Could’ve moved at like 1-2 hikes a year 5 years ago and gotten to the same destination without moving as quick. Maybe they could’ve punted at their previous meeting, but Trump all but ensured they had to hike. He dug his own grave on that. But honestly, do 25 basis points make that much of difference, and if they really do, isn’t it all a mirage anyways?

The Fed has too remove some of leverage in the system. Issuing debt to resolve debt problems doesn’t seem very smart, yet that seems to be the response in this boom and bust economy we are becoming. 

Squeezing some bad debt out of the system might cause pain and restrict growth for some time, but wouldn’t it be better to get off this debt addiction we have for long-term prosperity?

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46 minutes ago, ren hoek said:

I'm open to the possibility that targeting a 2% inflation rate, low unemployment, or price stability might be the best macroeconomic strategy.  I don't think it is best for the regular workaday individual, clearly, but I confess to not understanding the system as well as the econ wizards.  

But it seems fundamentally wrong to effectively grant the federal reserve a monopoly on the currency.  There should be multiple competing currencies legalized, people should be paid in and allowed to settle debts in any currency they like.  Gold/silver should really be treated like money for people who wish to use it that way.  People should be allowed to opt out of this system instead of going down with the ship. It seems doubtful that the reason it does not work like this is for our own economic wellbeing. 

What would you like this currency to be secured by if not the full faith and credit of the government of the United States?

Plenty of currencies are legal.  If you can get your employer to pay you in rubles, by all means ask. 

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1 hour ago, ren hoek said:

I'm open to the possibility that targeting a 2% inflation rate, low unemployment, or price stability might be the best macroeconomic strategy.  I don't think it is best for the regular workaday individual, clearly, but I confess to not understanding the system as well as the econ wizards.  

But it seems fundamentally wrong to effectively grant the federal reserve a monopoly on the currency.  There should be multiple competing currencies legalized, people should be paid in and allowed to settle debts in any currency they like.  Gold/silver should really be treated like money for people who wish to use it that way.  People should be allowed to opt out of this system instead of going down with the ship. It seems doubtful that the reason it does not work like this is for our own economic wellbeing. 

Are you familiar with cryptocurrencies? 

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16 minutes ago, Henry Ford said:

What would you like this currency to be secured by if not the full faith and credit of the government of the United States?

Plenty of currencies are legal.  If you can get your employer to pay you in rubles, by all means ask. 

Something that can't be printed or keyed into a computer out of thin air.  Something that won't lose 90% of its value on a long enough timeline.  Let me ask you this.  Assuming there was no difference in tax reporting or capital gains liability, would you rather hold $10k in gold at today's prices for 20 years, or $10k in USD for 20 years?  Why?

They're not legal in the same sense as USDs if they're subjected to capital gains tax and treated like securities.  If the only currencies allowed to function as currencies are central bank notes, that's not really a choice.  

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4 minutes ago, ren hoek said:

Something that can't be printed or keyed into a computer out of thin air.  Something that won't lose 90% of its value on a long enough timeline.  Let me ask you this.  Assuming there was no difference in tax reporting or capital gains liability, would you rather hold $10k in gold at today's prices for 20 years, or $10k in USD for 20 years?  Why?

They're not legal in the same sense as USDs if they're subjected to capital gains tax and treated like securities.  If the only currencies allowed to function as currencies are central bank notes, that's not really a choice.  

Sorry, you want to be paid in gold? Are you a pirate?

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6 hours ago, ren hoek said:

Not necessarily physical gold so much as something backed by it, but it'd be nice to have a choice.

Would you rather hold $10k in gold for 20 years or $10k in usd?  Why?  

Well, that depends.  If everything else stayed as it is right now, and that would be my only real asset, I’d prefer the dollars, unless you mean $10k in gold futures or something like that.  If you mean actual gold and that’s the only asset I’ll have, I’d prefer the currency. 

If there were multiple competing currencies and I could pay for things with gold, I’d have to see what fluctuated the least, which would probably be gold, but then you have the issue of determining weight, purity, etc at every transaction... unless you just mean we’re moving zeroes and ones around again in which case it’s just backed by gold and then we’re pretty much back to the same place as all currency for a variety of reasons. 

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10 hours ago, Henry Ford said:

What would you like this currency to be secured by if not the full faith and credit of the government of the United States?

Plenty of currencies are legal.  If you can get your employer to pay you in rubles, by all means ask

I think a few here are convinced Ren does already. 

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On 12/24/2018 at 1:35 PM, Henry Ford said:

So weird how having the treasury secretary personally call and check on liquidity with banks would make people a little worried. 

It is most worrying to me that the Treasury Secretary apparently hasn't read Basel III.  Banks legally cannot have liquidity issues anymore and have to report their more than compliance with the onerous LCR daily.

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On 12/23/2018 at 5:41 PM, bananafish said:

I miss @RedmondLonghorn and the economics talk, especially with all the bluster that abounds.

I pop in and out, but generally have only been posting in reply to specific notifications.

I am a lot less close to the data than I have been in the past, but I don't think you really need data to understand what is going on.

-The long economic expansion of the last ten years has been fueled by excess liquidity/low interest rates/cheap debt. Some might even say that artificially low rates were the main underpinning of the economy for much of that time.

-The Fed maintained very accommodative policy (low rates, huge Fed balance sheet of purchased securities) for a lot longer than it might have, out of a fear of deflation. I would also say a (perhaps subconscious) fear of volatility in financial assets prevented previous Fed chairs from embarking on a move towards "normalization" when they might have.

-Powell is a more hawkish Fed chair than Bernanke or Yellin. He also is perhaps more realistic and, maybe most importantly, facing a different set of facts than either of the previous Fed chairs were. The problem was that with rates near zero, the Fed was left without critical policy tools that it needs on hand during the next downturn. Put simply: you can't lower rates much when they are starting near zero. The argument behind the inaction was that the inflation rate wasn't high enough to justify raising rates. I understand that argument, I just never accepted it as sufficient to justify what they ended up doing (or not doing).

-The decisions by Bernanke and Yellin to keep rates so low while the economy was doing well means that Powell inherited a Fed that was way behind the curve. He is trying to catch up, but with the prior expansion so long in the tooth he is literally racing to raise rates before the next recession, while also dealing with the challenge that raising rates too quickly could push the economy into recession. It is a tough hand he has been dealt.

 

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