Fed is tapering too early, needs to wait for next recession: Schatz

Yahoo Finance

Editor's Note: The following was written by Yahoo Finance Contributor Milanee Kapadia. You can follow her on Twitter @MilaneeKapadia

The U.S. economic expansion that began in mid-2009 has hit the five year mark. But if you calculate from the second quarter of 2009, real GDP grew by just 2.2% a year. This year Q2 grew at an annualized rate of 4% following a 2.1% contraction in the first three months of the year. With that scenario in mind, is Fed talk of tightening monetary policy next year jumping the gun?

Paul Schatz, president of Heritage Capital thinks so. He argues that it's important the economy fully recovers before there is a tightening, “The mistake that feds or governments make after the first recession, the minute the light in the tunnel is clear, they start raising rates. My argument is that GDP growth back to 4% or higher is not going to be seen until we get through one more mild recession.” Schatz is expecting another recession as early as 2015 or 2016. He even says the Fed should not have wound down its monthly bond buying program which wraps in October.

The last time the central bank raised rates was 2006 and has held its benchmark interest rate near zero since December 2008. Most fed officials says they will need to tighten in 2015.

Inflation has been getting closer to the Fed’s 2% target but Schatz says its better to get a slow rise in wages and prices than tighten monetary policy too soon. Schatz cites former fed chairman Ben Bernanke saying, "Inflation is very easy to fix with higher rates. Deflation as we see in Japan is very hard to cure. So you wanna make sure you avoid deflation at all costs."

Fed funds futures suggest the first increase in borrowing costs may come in October 2015 but the President of the St. Louis fed has hinted at an increase as early as the first quarter of next year.

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