Flip-Flop by Fed Scrambles Outlook for World Markets

The central bank’s new friendly tone cascaded through the financial world in ways large and small. A look at the consequences.

Comments: 18

  1. Well right, American choices- whether deliberate policies or supermarket selections- have international consequences. Nothing new there. The real story is a Fed that lacks self confidence in its own policy analyses, its own influence in the markets, and its own independence from a real estate President who believes in maximum leverage as a universal tonic. Bernanke’s Fed displayed the intellectual confidence and policy chops to ignore the sheep bleats of Republicans nervous about inflation, aninflation still not apparent. Bernanke did what had to be done. With fiscal tools frozen by a hostile republican Congress, only Bernanke’s monetary policies saved us from a long and dreary austerity that would have farther ripped the social fabric. That Powell lunches with Mnuchin and Trump is hardly good news. When you dine with the Devil, bring a long spoon.

  2. Thanks for such a clear, concise explanation. I feel like I just passed a course in basic economics.

  3. @Andy It is actually a very poor explanation because it is missing a fundamental effect of monetary policies, which is the pure monetary effect that they have. It is not just about your economy being stronger or weaker (otherwise the choice would be quite obvious), or even about whether your country has a stronger or weaker currency (and if it was the latter you would need to mention spiral effects: if all central banks try to prop down their currencies, does anything bad happen?). See my comment above: low interest rates make it better for people who own financial assets (which can include properties since in some markets, such as most major metropolitan area, they behave like financial assets), but it makes it worse for people who don’t own assets.

  4. The root issue on interest rates is that nobody with any political power wants people to save money. The financial industry wants to churn stocks and make big fees. Public companies depend on low interest rates to borrow money in order to buy back stock - instead of investing in their business. Developers like Mr. Trump depend on low interest rates to operate. Retailers and manufacturers want us to spend on stuff we don't need.

  5. @skeptic The problem is more that it is very easy to explain that highly-valued assets are good for people who CURRENTLY own assets. It is much more difficult to explain that it makes people who will buy assets IN THE FUTURE poorer. Who cares about the future? A boost to the economy in the short term, while making it harder for future generations: that’s certainly an interesting proposition for a president who doesn’t care about deficits, about depleting finite natural resources, about torpedoing long-term alliances, or basically about whatever happens to the country after he’s gone as a president.

  6. Yes, very true. And sugar is much loved by children and the weak minded.

  7. There are structural DEflationary forces that analysts in the private sector and in central banks ignore at their peril. Namely, overcapacity and actual or potential overproduction of just about everything. This caps inflation. Cheap, easy credit, innovative flexible capital goods hardware and software, unimpeded flows of labor capital, et cetera are the causes.

  8. I didn't realize the Fed worked for Wall Street...things are a bit clearer now...

  9. LOL. Let’s just say they have a “split mandate”.

  10. Good for companies. Bad for old people.

  11. Wow, I am very surprised, and also slightly concerned, that this article doesn’t even mention the main effect interest rates have on capital markets (bonds and stocks), which is the pure monetary effect (obviously quite important in a monetary policy). The value of a bond or a stock is fundamentally the money it will earn you in the future (interest or dividend) if you own it. Obviously having $1 now is better than having $1 in the future, because if you have $1 today you can invest it and expect to have more than $1 in the future. So the higher the interest rate, the less $1 tomorrow is worth. The higher the rates, the less your stocks and bonds are worth, even if companies earn just as much money and are just as able to pay back their debt. Now you can understand that people owning bonds and stocks are worried about the value of their portfolio going down. That will indeed hurt a lot of people financially. But When you look at this impact, you see that this is a zero-sum game: the higher the rates, the less you have to pay to earn $1 more at retirement. The winners are people who still need to save for their future. If you don’t look at that monetary effect, you don’t understand that interests are not just about having the economy being stronger or not (otherwise we would pretty much always want it to be stronger). It is also about tomorrow’s distribution of wealth. I don’t think people understand enough how low interest rates are screwing up a whole generation.

  12. I knew it was a bubble when my random coworkers started talking about it at the office.

  13. People pay too much attention to what Powell says, snd way to miuch to what people say about what Powell says, especially the over-simplified version they get in the financial news. For example, Powell said the case for raising rates had "weakened somewhat," but the "somewhat" goes reported. In December when he said the normalization of the Fed balance sheet was on "autopilot," the Street freaked out, as if pilots don't turn off auopilot when concitions warrant. In sum, the much touted "flip-flop" is mostly illusion, the result of over-parsing s slight change in tone. The most import term remains "data-dependent." and global commodity prices probably weigh more heavily than a snit in the stock market. In the face of a trade war, Brexit anxieties and signs of a global slowdown, it was only sensible for the Fed to signal more caution and "patience." A pause,is not a flip-flop, and if the next jobs report shows wage growth strengthening notably, rate hikes may very well resume unless ex-U.S. weakness induces other central banks to stimulate, as the Fed understandably does not want to get too far out of line with what they are doing and ex-U.S. weakness is likely to come here eventually.

  14. @eisweino Edit: "reported" should be "unreported."

  15. The implication of this article is that the Fed made a mistake by putting on hold future rate hikes. The mistake was not putting on hold further rate hikes but rather hiking the rates in December, an opinion I held before the December meeting of the Federal Reserve. Right now the interest rate on the treasury two year note, the note most sensitive to the Fed's action, shows the 6 month note offers a better yield than on the two year note. Since normally holding treasury paper for a longer time period increases the risk and therefore yields. The implication being that the bond market foresees a possible lower Fed Fund Rate in the next year. Powell's problem was accelerating the pace of rate rises, four in 2018 as opposed to two in 2017 and fortunately he had the wisdom to not aggravate the situation even more. Neither the main stream press nor the economic leaders in Washington or Wall street acknowledge that our economy suffers from "secular stagnation", a condition that requires caution in increasing yields.Had they beeb aware, the Fed would have moved slower or Wall street would have balked at the rapid pace. The most pressing today is not inflation but deflation

  16. Nobody seems to be talking about the fact that the federal reserve is appearing to cave to pressure from the executive branch. Which is absolutely nuts! We have already politicized it to some degree, but under this president we're making it directly beholden to political whims! He talked about doing this during his candidacy. What this means is that we're going to have politicians manipulate the money supply to their short-term desires. If you're concerned by them disagreeing on budget issues, wait until we start having fights over our money supply.

  17. Economy and financial rivalries and/or conundrums could not anymore, as it used to be the case, solved by wars. There could be 'tariffs wars', amending or closing big trades, designing financial blockades but no more the classic war. In true reality, prolonged peace time looks like uncharted territory for economists and governments. The use of 'transitory' QE and QQE is becoming the rule as it is to keep indefinitely the interest rates low. Debts and deficits are getting higher and higher but the risk is giving place to tolerance which is reaching the status of theory or doctrine. It's getting like Heisenberg new 'norm' in Physics where all lay down to probabilities. Welcome to the XXIst century Economy.

  18. Fed Chief Powell’s 180 on Quantitative Tightening and misscharacterization the economy as “rosy” pushed stock prices up into a higher valuation risk area. Investors are now at greater risk. If the Fed is forced to raise rates later in the year, stocks will tank. If weaknesses in the economy (housing, consumer confidence/sentiment, manufacturing) widen, the market tanks ahead of a recession. Fed is micromanaging and should let stock prices find their own comfort level.