Autumn’s Known Unknowns

By Nouriel Roubini

Nouriel Roubini

On monetary policy, the European Central Bank’s forward guidance – the commitment to keep interest rates at a low level for a long time – is too little too late and has not prevented a rise in short- and long-term borrowing costs, which could stifle the eurozone’s already-anemic economic recovery.

During the height of the Iraq war, then-US Secretary of Defense Donald Rumsfeld spoke of “known unknowns” – foreseeable risks whose realization is uncertain. Today, the global economy is facing many known unknowns, most of which stem from policy uncertainty.

In the United States, three sources of policy uncertainty will come to a head this autumn. For starters, it remains unclear whether the Federal Reserve will begin to “taper” its open-ended quantitative easing (QE) in September or later, how fast it will reduce its purchases of long-term assets, and when and how fast it will start to raise interest rates from their current zero level. There is also the question of who will succeed Ben Bernanke as Fed Chairman. Finally, yet another partisan struggle over America’s debt ceiling could increase the risk of a government shutdown if the Republican-controlled House of Representatives and President Barack Obama and his Democratic allies cannot agree on a budget.

The first two sources of uncertainty have already affected markets. The rise in US long-term interest rates – from a low of 1.6% in May to recent peaks above 2.9% – has been driven by market fears that the Fed will taper QE too soon and too fast, and by the uncertainty surrounding Bernanke’s successor.

Read full article as published in Project Syndicate

Nouriel Roubini is a Professor of Economics and International Business and Robert Stansky Research Faculty Fellow.