Federal Reserve Chair Janet Yellen can blame herself and her two predecessors, Alan Greenspan and Ben S. Bernanke, for the quandary she now faces on whether to raise interest rates, said Ed Yardeni, president and chief strategist at Yardeni Research.
“The bad joke is that these three central bankers implemented their ultra-easy monetary policies to avert financial meltdowns and to restore financial stability,” Yardeni said in his daily briefing on Sept. 16. “Now the Fed is stymied from normalizing monetary policy and raising interest rates by fears that doing so will cause financial instability.”
The central bank today will make its most important decision on borrowing costs since it began tapering its bond-buying programs in January 2014. Those programs, known as quantitative easing, flooded the financial system with trillions of dollars to support growth.
The Fed has kept interest rates near zero percent for the past seven years to help the global economy recover from the biggest decline since the Great Depression. U.S. stocks rebounded to record highs this year and now face threats from the eruption of currency and debt crises in other countries. China’s currency devaluation last month led to a global sell-off in equities.
“All the slapstick comedians running the major central banks should get credit for creating the mess confronting the emerging-market economies,” Yardeni said. “Their near-zero interest-rate policies stimulated a hysterical worldwide, reach-for-yield buying panic for all the junk bonds issued by EMEs.”
He said the global financial system is better prepared to handle major debt defaults than in the past.
“This time the debt excesses of the past several years have been financed mostly by the capital markets rather than the banks in North America and Europe,” Yardeni said. “Capital markets can absorb losses better than banks. Notice, however, that I didn’t include China’s banks, which continue to be very much involved in the country’s borrowing binge.”
Yardeni and his firm’s chief economist, Debbie Johnson, foresee a slow rise in rates.
“Debbie and I have been anticipating either one-and-done or none-and-done for 2015 since September 2014,” he said. “If it’s none-and-done, there could be a significant liftoff in the prices of commodities, bonds, stocks and currencies around the world.”
Cautious fund managers are bracing for a recession as they pull money out of emerging markets like China and seek the safety of cash and bonds, according to Bank of America Merrill Lynch
The bank’s monthly survey found that the percentage of investment professionals who were weighted toward stocks fell from 41 percent in August to 17 percent this month, the lowest in three years. Fund managers also had the worst expectations for global economic growth in five years.
That kind of widespread gloom may be a contrary indicator of stock-market gains, said Michael Hartnett, chief investment strategist at BofA.
“Unambiguous pessimism means risk assets riper for a rally,” he said in a Sept. 15 report obtained by Newsmax Finance. “If no rally, then markets ominously hinting ‘recession’ and/or ‘default' imminent.”
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