Mixed economic signals could indicate a coming recession, a Federal Reserve Bank of Dallas officer said Thursday in Texarkana, Texas.
Joseph S. Tracy, executive vice president and senior adviser to the president at the Dallas Fed, made the comments during a luncheon at Northridge Country Club sponsored by Texas A&M University-Texarkana's College of Business, Engineering and Technology. He stressed that his views were his own and not official positions of the Fed.
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It is "a very important time period for the central bank's decision-making," Tracy said.
Since the Great Recession a decade ago, the U.S. has seen its longest economic expansion after World War II, he said. But recent government policy decisions have prevented federal budget surpluses seen previously at similar points in the economic cycle, such as at the end of the Clinton administration.
"We should, now that we are the longest expansion, be back in surplus. We should be paying back some of that debt that we incurred. That's not what's happening, and in fact, it looks like the deficits are going to be growing. This is a concern, too, because we should be building fiscal capacity now in case we need to use it in a future downturn. We are not building that fiscal capacity, and the budget forecast by the (Congressional Budget Office) suggests these deficits are just going to grow. And they're assuming the expansion continues in those scenarios," Tracy said.
Because slowdown is expected, it is difficult to interpret some indicators, he said.
"We have this interesting juxtaposition where the equity markets are booming—they're at all-time highs—and the bond market is signaling a recession.
"Are we just slowing after a fiscal stimulus, and we'll stabilize at 2% (growth)—in which case, again, you might argue we just need to take some time and let the dust settle—or is something more severe, maybe emanating from abroad, happening that's going to have stronger implications for the U.S. economy and actually cause us to dip below 2% and actually go into a recession?" Tracy asked.
If a recession does occur, the Fed may have relatively few options, he said.
"It's not clear how aggressively the fiscal authorities could intervene if they had to in a recession, given where the deficits are today. And then the second need is that our interest rate is half of what it was, so there's much less room to cut interest rates. And you're starting with a balance sheet that's already much higher than it was before. So there's aspects where both fiscal and monetary ammunition might be less than what we had previously.
"The one difference is we never had any experience with using the balance sheet to help provide stimulus to the economy. We were learning, I think, about that experience, and so we would probably be able to do that more effectively going forward," Tracy said.
Tracy joined the Dallas Fed in September 2017, according to the bank's website. He was previously executive vice president and senior advisor to the president at the Federal Reserve Bank of New York. He previously served as that bank's director of research. He joined the New York Fed in 1996 after teaching at Yale and Columbia universities.
He is a native of Missouri and holds a Bachelor of Arts from the University of Missouri and a Ph.D. in economics from the University of Chicago.
Proceeds of the $45-per-plate luncheon benefited A&M-Texarkana's scholarship fund.