Global economy cant stomach 4 Fed rate hikes, ex-Treasury chief warns
The Federal Reserves controversial decision to raise interest rates in December has generated its fair share of accolades as well as criticism.
Fans of the move say the rate hike was long overdue, while foes say the central bank is tightening monetary policy at exactly the wrong time, just when the Chinese economy is slowing and threatening to take down global markets with it.
Top central bankers are forecasting as many as four more interest-rate increases over the course of 2016. Supporters of this track point to Decembers employment report from the Labor Department, issued Jan. 8, which showed that job creation surged to 292,000 positions that month, with the unemployment rate holding steady at 5%.
Wages, inflation missing expectations: However, stagnating wages remain a concern. Average hourly earnings slipped by a penny in December from November, The Wall Street Journal reported. Wages were up 2.5% from a year earlier, among the best annual gains of the current expansion, but the improvement remains below historical averages.
Meanwhile, inflation expectations are simply not materializing. Since the Fed hiked rates in December, the markets inflation expectations have collapsed in yet another clear indication of policy error, Zero Hedge commented.
With Fed Vice Chairman Stanley Fischer having said that four hikes this year are in the ballpark, critics are coming out of the woodwork to say thats too much too soon, particularly because of the volatility already seen in global stocks as well as the collapse in oil prices.
Slowing U.S. growth: Recent market turmoil is furthering the concern that global growth has slowed significantly, as well as raising the possibility that domestic growth could be slowing, Boston Fed chief Eric Rosengren said Wednesday.
Rosengren urged caution about the pace of future hikes. While monetary policy should not overreact to short-term temporary fluctuations in financial markets, policy makers should take seriously the potential downside risk to their economic forecasts and manage those risks as we think about the appropriate path, he said. These downside risks reflect continued headwinds from weakness within countries that represent many of our major trading partners, and only limited data to support the projected path of inflation to target.
Further tightening will require data continuing to be strong enough that growth will be at or above potential, so that Federal Reserve policymakers can be confident that inflation will reach our 2% target.
Atlanta Fed chief Dennis Lockhart also advised patience, saying the central bank likely should keep watching incoming data until April before considering another rate hike.
Perfect storm near, Summers says: The two Fed presidents found a serious ally in one-time Fed-chairman hopeful and former Treasury Secretary Lawrence Summers, who warned that risks are substantially tilted to the downside in 2016.
I would be surprised if the world economy could comfortably withstand four hikes, and I think that basically the markets agree with me, and thats why, despite the statements that are being made, markets arent expecting four hikes, Summers argued, saying Chinas slowdown has created almost a perfect storm of problems for the rest of the world. Really, what policymakers need to think about is, it is insurance against the more negative scenarios.
Summers said he sees a significant risk that the Fed will have to start loosening the monetary spigots once again as the U.S. economys slowdown becomes undeniable.
Huge mistake could repeat 1937: Given the ongoing risks in the world economy, at this point in time its very unlikely that the Fed can maintain its promised pace of rate increases. Low rates will continue to support gold prices. And if the Fed continues to tighten into the growing deflationary winds, it also could spark a renewed flight into gold by digging an even deeper bearish hole for stocks.
Dont repeat the mistakes the Fed made in 1937, one investing pro recently told CNBC. One and done is OK. Its not that damaging, BK Asset Managements Boris Schlossberg said of the Feds first rate hike.
But he warned that further increases would be a huge 1937-type of mistake, when the Fed raised rates during a breather in the Great Depression, sparking another downturn.
Were in a real serious pickle now. Theres little policy flexibility left, Schlossberg said. This is going to be the year to sell rallies, not to buy dips.