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.