The Federal Reserve has a difficult balancing act to perform in pulling back from its massive easing program, say Nouriel Roubini, a New York University economist, and Ian Bremmer, president of Eurasia Group, a consulting firm.
“The weak real economy and job market, together with high debt ratios, suggest the need to exit monetary stimulus slowly,” the duo writes in Institutional Investor. “But a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger.
“In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate,” they note. “This time the unemployment rate and household and government debt are much higher,” the pair adds.
“If financial markets are already frothy, consider how frothy they will be when the Fed starts tightening — and then when the Fed finishes tightening.”
The economy grew 2.4 percent in the first quarter, and unemployment stood at 7.6 percent in May.
Read More at moneynews.com . By Dan Weil.