Wolff Responds: "RECESSION???" Dated April 9, 2025

Grateful for your work, professor.

🇺🇸 Trump: Better Coverage than 5G...Can you hear us now? 🇺🇸 Get ready to celebrate the 2025 Presidential Inauguration!

The inherent contradictions will always play out eventually

Thanks for sharing. Now he’s backed off on everyone but China.

1/2 Grok “Let’s dive into the changes in Federal Reserve monetary policy during 2019 and 2020 and unpack the reasons behind them. This period was marked by a shift from tightening to easing, followed by an extraordinary response to a global crisis. Here’s a thorough explanation: 2019: From Tightening to Easing In 2018, the Federal Reserve was on a path of monetary tightening, raising interest rates to normalize policy after years of near-zero rates following the 2008 financial crisis. The federal funds rate—the key overnight lending rate between banks—had climbed to a range of 2.25%–2.5% by December 2018. The Fed was also shrinking its balance sheet by allowing bonds it had purchased during quantitative easing (QE) to mature without reinvesting the proceeds, a process known as quantitative tightening (QT). Why the Shift in 2019? By early 2019, cracks started to appear in this strategy. Several factors prompted the Fed to pivot: 1. Economic Slowdown Signals: Global growth was decelerating, particularly in China batuand Europe, due to trade tensions and manufacturing weakness. In the U.S., indicators like the yield curve (which inverted briefly in 2019) hinted at a potential recession. An inverted yield curve—where short-term rates exceed long-term rates—has historically been a reliable predictor of economic downturns. 2. Trade War Uncertainty: The U.S.-China trade war, with its tariffs and retaliatory measures, was injecting uncertainty into markets. Businesses delayed investments, and consumer confidence wobbled. The Fed saw this as a risk to its dual mandate of maximum employment and price stability. 3. Inflation Below Target: Despite rate hikes, inflation remained stubbornly below the Fed’s 2% target. Core PCE (Personal Consumption Expenditures), the Fed’s preferred gauge, hovered around 1.6%–1.8%. This suggested the economy wasn’t overheating, reducing the need for aggressive tightening. 4. Market Volatility: Late 2018 saw a sharp stock market sell-off, partly due to fears that the Fed was tightening too fast. While the Fed doesn’t target stock prices, it monitors financial conditions. The turbulence signaled that markets expected more accommodation. Actions Taken In response, the Fed halted rate hikes in January 2019 and signaled a pause. Then, starting in July, it cut the federal funds rate three times—by 25 basis points each—bringing it to 1.5%–1.75% by October. It also ended QT earlier than planned, stabilizing the balance sheet at around $3.8 trillion. In late 2019, the Fed intervened in the repo market (where banks borrow short-term funds) with liquidity injections after unexpected spikes in borrowing rates, reflecting strains in money markets partly due to QT’s lingering effects. The goal? A “mid-cycle adjustment” to cushion the economy against downside risks without signaling a full-blown recession response. Fed Chair Jerome Powell emphasized insurance against global uncertainties rather than a reaction to imminent collapse. 2020: Crisis Mode Unleashed If 2019 was about fine-tuning, 2020 was a sledgehammer response to the COVID-19 pandemic. The economy didn’t just slow—it fell off a cliff as lockdowns halted activity in March. Why the Dramatic Change? 1. Pandemic Shock: The virus triggered unprecedented shutdowns. Unemployment soared from 3.5% in February to 14.8% in April, the worst since the Great Depression. Businesses shuttered, supply chains broke, and demand evaporated in sectors like travel and hospitality.”