Tags: federal reserve | invest | economy | QE

Fed May Get Trapped in 'QE Black Hole'

Fed May Get Trapped in 'QE Black Hole'
(Dollar Photo Club)

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Monday, 31 August 2015 09:03 AM Current | Bio | Archive

Over the weekend, The Financial Times (FT) informed senior Chinese regulatory officials stated at a meeting late Thursday: “… they mishandled the stock market rescue efforts by allowing too much information to become public…”

The FT also informed Chinese authorities had decided to abandon attempts to boost stock markets through large-scale stock purchases, but these same authorities fell short to mention when that would go into effect.

No wonder, the Chinese government intervened in the markets through large-scale buying last Thursday, which caused the Shanghai Composite index to move 5 percent higher during the last trading hour, a move that was repeated on Friday.

In my opinion, investors that are still interested in the Chinese markets over the short term could do well waiting until the ongoing market correction is over and stock prices reflect to a better degree the real economy.

In this context, on Friday, the Chinese National Bureau for Statistics (NBS) informed profits of major industrial enterprises (what they call "above designated size") decreased by 2.9 percent on a yearly basis while profits of state-holding industrial enterprises “above designated size” decreased by 22.1 percent year-over-year, which continues to point to further slowing growth in China.

Anyway, Goldman Sachs cut its forecasts for Chinese growth to 6.4 percent in 2016, down from 6.7 percent, while it expects growth to decelerate further as it now expects growth for 2017 at 6.1 percent (prior 6.5 percent), 5.8 percent in 2018 (prior 6.2 percent) and a growth rate coming in at around 5 percent in 2020-2024, and around 4.5 percent thereafter.

If the people at Goldman Sachs are right, long-term investors could probably be better off not making their investment decisions based on “hope” Chinese growth accelerating again any time soon.

Of course, the slump we’re witnessing at present in commodities, caused mainly by the Chinese slowdown, has also still some time to run.

That said, at the Kansas City Fed Economic Symposium in Jackson Hole, Wyoming, Fed Vice-Chair Stanley Fischer made various prudent but interesting remarks: “… Can the Committee be "reasonably confident that inflation will move back to its 2 percent objective over the medium term"? As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further … the Committee has indicated in its post-meeting statements that it expects inflation to return to 2 percent … we will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment.”

Keeping in mind the Fed historically adjusted its rates more or less 18 months before their expected U.S. economy situations took hold, we could anticipate with what Mr. Fischer said, the chances the Fed will start hiking this year and the first move in September remains very well on the table if Friday’s job situation numbers don’t disappoint, whatever happens to the Chinese economy that is on its “slowing” path for years to come.

So, in case Friday’s job numbers are good, maybe the FOMC voting members could do well recalling what former Dallas Fed President Mr. Fisher warned for in a speech in July last year: “… I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose too long. We did a good job in staving off the deflationary and depression risks that were present in the aftermath of the 2007–09 financial crisis. We now risk falling into the trap of fighting the last war rather than the present challenge … should we overstay our welcome, we risk not only doing damage to the economy but also being viewed as politically pliant.”

I think Mr. Fisher was and is still very right because, but that’s my personal opinion, if there is no obvious U.S. economic reason for delaying the first step to “normalization” in September, the Fed could become at increasing risk of getting trapped into some kind of a “QE black hole,” which is a very serious risk would that ever occur.

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HansParisis
The Fed could become at increasing risk of getting trapped into some kind of a “QE black hole,” which is a very serious risk would that ever occur.
federal reserve, invest, economy, QE
684
2015-03-31
Monday, 31 August 2015 09:03 AM
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