FED officials don’t know what to do. US economic data is showing signs of strong economic recovery. FED has winded down its monetary stimulus popularly known as Quantitative Easing QE. Strong economic recovery as indicated by the data means tightening the monetary policy. But FED officials are faced with a dilemma. They did exactly that in 1937 when the US economy showed strong signs of recovery after the massive Stock Market Crash of 1929 and the onset of the Great Depression. The result was deepening of recession.
The specter of 1937 is weighing on the minds of top Federal Reserve officials as they work on a road map for unwinding their unprecedented economic stimulus. That was the year, following a recovery from the Great Depression, that the Fed prematurely tightened monetary policy and was forced to backtrack as the economy fell back into a recession.
Back then little was known about how the economies worked. Maynard Keynes had recently expounded his new economic theory that became popular as Keynesian Economics. Fast forward today. Still not much is known how the market reacts to the different stimuli. Unlike physics where new theories can be tested by creating the conditions in the labs, economic policy does not allow testing. You can only taste the pudding once it has been baked. Did QE work? Stock prices rose because of QE. However, market analysts are already saying that by launching QE, FED has already inflated another bubble that is about to burst. Daily you must be reading artilcles on CNBC and Bloomberg about the coming stock market crash. No one can tell for sure.