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No rate hike - the Fed comes full circle
So the US Fed didn't raise interest rates at yesterday's meeting. Markets everywhere were betting on this - the fed funds futures contract was pricing in a probability of a rate hike at only 32 per cent on the eve of the meeting - so the Fed lived up to expectations. And although I believe the Fed was wrong not to raise rates because it has interfered with the normal operation of markets for too long by keeping rates depressed, I also argued in a Hock Lock Siew this week that a rate hike would be devastating to the US consumers who have pushed their personal debt to an all-time high.
All sorts of analogies are possible - the Fed has painted itself into a corner, it found itself caught between a rock and a hard place, and so on. The fundamental point however, is that the Fed created the problem in the first place by taking its eye off the ball in the wake of the dotcom boom and bust of early 2000 and allowing full-scale liberalisation of markets while failing to ensure proper regulation of its banks. It then compounded the problem in 2006 onwards when the sub-prime crisis hit by declaring its crooked banks "too big to fail'', bailing them out with guarantees of unlimited money printing and essentially removing risk from the table, resulting in huge bubbles being inflated in risk assets everywhere. Worsening the situation was that the Fed's approach to monetary policy was then copied by central banks everywhere, from the ECB to BoJ to PBoC. Now with China imploding and its central bank appearing seemingly unable to stem the bleeding, the Fed has come full circle, admitting in its post-FOMC meeting comments this week that the turmoil in China has contributed to the decision not to raise rates.
One expert observer has noted that if China is now calling the shots and dictating Fed policy, then this does not bode well for markets. I agree - in a recent blog posting I quoted an author who said the Fed should show some spine and raise rates in order to allow markets to correctly reprice risk again. It didn't and now markets will have another few months of uncertainty ahead of them.