Wednesday, August 26, 2015

The fundamental reasons why The Fed should be resisting it's instinct to tighten policy

The Federal Reserve next action plan is crucial, Atlanta Federal Reserve President Dennis Lockhart acknowledged on Monday that collapsing Chinese stock markets, plunging commodity prices, and an intensifying currency war have complicated the central bank's decision about whether to raise interest rates. As reported from Bloomberg news, There are more fundamental reasons, however, why the Fed should be resisting its instinct to tighten policy to protect the economic downturn

Big figure in financial markets -- whether its breakeven rates in the U.S. government bond market (the yield gaps between vanilla Treasuries and those which compensate bondholders for faster inflation) or euro-denominated inflation swaps (a type of derivative used by pension funds to help ensure they have enough set aside to pay people's pensions) -- negative rates abound. According to Mark Gilbert on Bloomberg

The description suggests consumer prices are more likely to slump than climb, Moreover, there's accumulating evidence that monetary conditions in the world's biggest economy have already tightened. The major trigger is China's yuan devaluation and interest cut rates

And then, Paul Kasriel, the former chief economist at Northern Trust who now writes "The Econtrarian" blog, argues that "in recent months Fed monetary policy has become downright restrictive," even as the benchmark interest rate has remained at 0.25 percent. Paul added, As the Fed unwound its third round of quantitative easing, Paul Kasriel argues, that tapering destroyed the "thin-air credit" that the central bank supplies to the financial system and to stabilize the financial market

Meanwhile Goldman Sachs also sees evidence that U.S. monetary conditions have already tightened. It's efficient way, Goldman compiles a financial conditions index that offers a snapshot of the monetary backdrop by blending market rates, and the spreads between them, with what's happening in equities and currencies markets. That index suggests conditions have rapidly tightened already

The latest economic atmosphere condition is not good news for the U.S. economy. Goldman economist Sven Jari Stehn said in a research report on Tuesday that current market conditions could knock as much as 0.5 percentage points off U.S. growth, with the "drag" rising to as high as 0.8 point by the end of the year. And if market turmoil deepens, that could exacerbate the slowdown. Oil prices fell down also could damage the economic stability

The latest economic data compiled by Bloomberg, Bloomberg calculates a different financial conditions index which tracks how much stress there is in U.S. markets, with a negative value suggesting financial conditions are tightening.

Source : Bloomberg

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