The Federal Reserve's extended easy-money policies are creating serious risks that could turn a future economic slump into a catastrophe, warns Stephen King, chief economist at HSBC.
To be sure, many of the dire predictions about the Federal Reserve's asset-purchasing and low-interest-rate policies over the last few years have not borne out; high inflation has not resulted, the Fed was able to exit their quantitative easing program without incident, and unemployment has indeed fallen dramatically. But King says the real risk actually lies in the future.
"The U.S. has had six years of recovery. And normally after six years, there have been plenty of opportunities to rebuild the kind of policy ammunition that policymakers rely upon during subsequent recessions. And normally, you would have higher interest rates, big improvements in the fiscal position, perhaps stabilization and even reduction in government debt. And this time around, none of that has actually happened," King said Wednesday in an interview with CNBC's "Trading Nation."
The Fed has maintained a basement-low target on the federal funds rate since December 2008, and only now is the central bank discussing raising it in the near future. For King, the risk is that policy does not return to normal levels by the time the economic cycle ends, leaving the central bank with reduced tools to save an economy in need.
"The danger is that we have a recession, say, in two or three years' time [and] we haven't got the usual policy ammunition to fight that recession with," King said, adding dramatically: "So it's like an ocean liner going across the ocean without lifeboats." (Tweet This)
On the other hand, the state of the economy doesn't exactly bring to mind the peak of an economic cycle. As King grants, "the pace of the recovery is much, much weaker than has been the case in the past," which both argues for continued lower rates, and points to a lower chance of a serious slowdown ahead.
The Fed, for one, says that even after the first rate hike, it will not be in a rush to return to historically normal policy conditions.
"The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the long run," the Fed's policy-making committee wrote in its last statement.
But for the HSBC economist, that decision, and similar ones by central banks around the world, could reflect a short-sightedness that creates glaring vulnerabilities.