The entire sequence of monetary policy since 2007 has been one in which the Fed has blundered repeatedly but picks itself up just in time to blunder again.

The Fed was slow to recognize the gravity of the financial crisis in 2007 and 2008. QE1 was needed for liquidity reasons, but the Fed bungled the implementation by keeping insolvent banks open and propping up the same failed executives who caused the crisis in the first place. QE2 and QE3 were unnecessary and did nothing to return U.S. growth to its historic 3.2% trend (instead, growth has been stuck at 2.2% since 2009, costing the U.S. trillions of dollars in lost wealth).

Fed growth forecasts have been wrong for over a decade by orders of magnitude. Since 2017, Fed tightening by raising rates and reducing its balance sheet has slammed the brakes on growth and put the U.S. economy dangerously close to a recession. None of those failures has deterred the Fed from its latest mistake.

As described in this article, the Fed has now put policy on hold (a so-called “pause”) by promising not to raise rates until further notice and by planning to stop balance sheet normalization later this year.

The market has cheered these signs of ease with higher stock valuations since the post-Christmas rally. What neither the markets nor the Fed seems to comprehend is that monetary policy works with lags of 12–18 months. The slowing of the economy today is the result of monetary tightening since 2017.

That slowing will continue over the course of this year. Any beneficial impact from today’s Fed easing won’t emerge until 2020 at the earliest.

Of course, that happy ending assumes the economy does not fall into recession between now and then, based on the damage the Fed has done already. Don’t count on it.

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