Tags: Gray | swans | Fed | market

MarketWatch's Gray Swans for 2015: Fed Policy, Oil and More

By    |   Tuesday, 23 December 2014 12:33 PM

Investment luminary Nassim Nicholas Taleb made the idea of a black swan event — one that was totally unexpected by investors — popular following the 2008 financial crisis.

Now MarketWatch writers William Watts and Joseph Adinolfi have put together a list of possible gray swan events — "occurrences that aren't wholly unpredictable, but are insidiously laying in plain sight" — for 2015.
  • The Federal Reserve might move too quickly or too slowly to raise interest rates. Most economists expect the Fed to begin hiking around mid-2015. "If the Fed gets spooked and moves too soon, too fast it could derail the recovery and then force the Fed to do an about-face. At the other extreme, the Fed could prove too patient, potentially setting up a scenario in which policy makers have to hike rates aggressively to catch up with resurgent inflation," they write
  • Oil prices could rebound sharply amid a supply disruption.
  • Cyber warfare, such as the recent attack against Sony, could intensify. "Events that could make the 2013 Target Corp. data breach look like child's play, could pose one of the most worrisome problems in coming years," Watts and Adinolfi maintain.
  • Liquidity could suddenly evaporate in financial markets, as market makers shun risk.
  • Emerging markets may face a currency crisis, as oil continues to fall and the Fed increases rates. Many emerging market currencies already have stumbled this year, with the ruble down 40 percent.
  • Ebola could spread. "A global pandemic, while unlikely, remains a slim possibility. The Ebola epidemic, which started in late 2013, could spread to other nearby countries in West Africa and beyond," the pair writes. "The global population will not be truly safe until the infection rate drops to zero. Arguably another troubling development in Ebola could result if a more virulent strain emerges in the future."
Meanwhile, former Federal Reserve Vice Chairman Donald Kohn says the economy's momentum will likely carry over into next year, "providing a solid base for sustained good growth and a pickup in underlying inflation."

GDP expanded 5 percent annualized in the third quarter, an 11-year high.

The plunge of oil prices to five-year lows will give the consumer sector even more punch, Kohn, now a senior fellow at the Brookings Institution, writes on Brookings' website.

"If that's all we anticipated, the Fed could exit from . . . near zero interest rates . . . readily in 2015," Kohn says.

"There are however, some clouds on the horizon that raise doubt about whether conditions will be right for the Fed to be able to lift its policy rate off of zero this year." The big issue is slow growth overseas, Kohn writes.

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Investment luminary Nassim Nicholas Taleb made the idea of a black swan event — one that was totally unexpected by investors — popular following the 2008 financial crisis.
Gray, swans, Fed, market
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2014-33-23
Tuesday, 23 December 2014 12:33 PM
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