The FED Apathy and its Dire Consequences

The High Drama

The high drama and suspense around the possible outcome of the two day FOMC meet boiled down to Janet Yellen’s obvious apathy to outline the specifics of the event itself. The Fed fell way short of the conviction required to convince world markets that the US economy was back at its best and could perform even in the face of global headwinds. After headlines beamed on television screens across the world that the FED had decided to leave rates unchanged, Janus Capital Fund Manager Bill Gross was quoted saying "I’m choked with emotion and hardly able to speak".

U TURN

A little over a fortnight back, Chair Yellen was at her Hawkish best at the Jacksonhole Symposium where she went all out and declared that there could be two possible rate hikes in 2016. Even more surprising is the fact that the FED lowered its forward guidance yesterday to 0.6% by the end of 2016 from 0.9% which it had laid out in the month of June. A quick look at the US economic data reveals that the Country’s unemployment rate stands at an impressive 4.9% while CPI figures stand at 1.1%. In its last report the US Labor department declared that 151 thousand new jobs were added which was well above the average of 135 thousand since July 2015. The country’s core CPI numbers excluding Food and Energy is hovering around the 2.3% mark which is a screaming indication that the Federal Reserve is relying heavily on the Energy Sector to deliver, before it can actually raise the rates. It is not surprising thus that American investor Wilbur Ross, also known as Economic Advisor to Donald Trump is betting big on Crude Oil and Energy Sector.

Housing Stats

A recent survey conducted by the National Association of Home Builders revealed that builders are growing in confidence about single-family homes. Data also suggests that the US Housing Market has grown at a fair pace this year backed by steady job growth, wage gains and lower rates on mortgages. The Federal Reserve thus has no reason to hold its fire, if at all they are data dependent. Analysts are convinced and so are Global Markets that the Fed is more Market dependent and they clearly look like standing on sticky ground with US elections round the corner.

Consequences

For the United States and a major part of the emerging world, the Fed’s apathy could end up in Economic Disaster all over again. Near zero interest rates over a prolonged period of time could end up in asset bubbles. Even as the Global energy market is struggling with steep demand constraints, the US energy market is quickly restructuring the way it operates its energy sector. Lower cost of production would call for lower wages among other things. Lower wages lead to lower consumer spending which in turn would impact other sectors as well. The easiest solution thus is keeping interest rates low until the Economy shows real signs of recovery with inflation hitting the 2% target.That sounds like an interesting loop for yet another asset bubble to kick start a fresh round of monetary easing.