Fed interest rate decision leaves many scratching their heads

Asia Unhedged was wrong on its bet that the US Federal Reserve would raise rates last week, but on the other hand, we actually got what we wanted. But, on the other hand, the Fed said it hopes to raise rates in December.

As the kids say these days, WTF?

crystal-ball-500Just to refresh, Fed Chair Janet Yellen said Sept. 17: The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent. These developments may restrain U.S. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.

In other words, emerging markets are falling, China’s markets are falling and most other markets around the world, including the US, are falling, because everyone thinks a Fed rate hike in the midst of a deflationary spiral among commodities is a stupid idea. So, having rattled the world markets by threatening to raise rates, the Fed backed off from raising rates on the grounds that markets were rattled, and redoubled its commitment to raise rates anyway

This kind of decision not only doesn’t do anyone any good, but it also seriously undermines the Fed’s credibility. Moreover, it doesn’t remove any risk from the markets.

We though the Fed would raise rates by 25 basis points and then regret it. Instead the Fed did nothing and the rest of the world regretted it. Global stock markets took a dive following an initial bump up.

We don’t see how economic conditions are going to be much better in December.

Let’s just say, there’s an ill wind emitting from the Fed, and like most ill winds, this one stinks.



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