Edward Harrison — We are in the most dangerous period in the business cycle

The big picture then is this: a global economy into its ninth year of the business cycle that is starting to gain momentum with the US flirting with 3% growth and 4% unemployment with richly priced asset markets but a flattening yield curve.

We’ve seen this picture before.…

In retrospect, one could argue that the Fed’s late interest rate hike campaign was a policy error – that the Fed should have seen the flattening yield curve as a canary in the coal mine and resisted raising its policy rates despite any concern about elevated asset prices.

I think this is the Fed’s real conundrum this late in a business cycle. If the economy is running solidly and leading economic indicators are bullish, the Fed is hard-pressed to not raise rates in an environment in which headline unemployment is low and falling, asset prices are rich, and lending standards have loosened — even if the yield curve is flattening. Aren’t they supposed to take the punch bowl away?

I don’t have the answer to that question. Time and again, late in the cycle, the Fed has indeed taken the punch bowl away. And the result was recession and financial crisis.

That’s exactly why this is the most dangerous period in the business cycle.

Credit Writedowns
We are in the most dangerous period in the business cycle
Edward Harrison