In the runup to the upcoming FOMC meeting, policymakers debate the value of what would normally be considered unorthodox policy actions. Even as the U.S. economy grows with labor markets operating at levels associated with full employment, a loud public debate ensues around appropriate policy action. The consequences of the Federal Reserve’s actions in the next week could be with us for much longer than we think, culminating in the next recession and increasing the risk to financial stability. The Fed will be starting yet another monetary sugar high that doesn’t address the underlying structural problems created by powerful demographic forces which are constraining output and depressing prices.

By almost every measure policy makers should be considering another rate hike in anticipation of potential economic overheating from looming limitations on output. Instead, debate has been focused on the need to take preemptive action to avoid a potential slowdown.

An abrupt shift in thinking was set in motion last December when, after raising overnight rates by a quarter of a percent, Fed Chair Jerome Powell signaled more hikes were to come and that balance sheet reduction was on "autopilot." Alarmed by the market tantrum that ensued, Fed policymakers began a mop-up campaign which included its now famous "pivot" to patience.

While the Fed has more than succeeded in stabilizing markets, the ensuing liquidity driven rally has boosted asset prices including stocks, bonds, precious metals, energy, and even cryptocurrencies.

As Europe faces prospects that negative rates may become a long-term fixture in the euro region, concerns are mounting in the U.S. that the global slide toward negative yields could infect the market for Treasury securities should the U.S. slip into a recession. These concerns are well founded. In the post-war era, the Fed has reduced short-term rates by an average of 5-1/2 percent during easing cycles associated with recession. The required stimulus in a recession today could necessitate large scale asset purchases of nearly $5 trillion to overcome the monetary limitations of the zero bound. Such a policy action could easily result in negative Treasury yields.