A Benjamin Cole post
A round robin of the world’s major central banks suggests that the U.S. Federal Reserve, already out–of-step, will on December 16 become a misfit loner, an active menace to U.S. manufacturing and tourism industries, and a threat to global financial stability.
December 16 has been all but pre-ordained as Day One of “Lift Off,” when the Federal Open Market Committee (FOMC), which has been passively tightening for more than a year, will actively raise the federal funds rate by 0.25%.
Yes, the U.S. PCE core inflation rate is sagging below target of 2%, the economy is sluggish, and the dollar has been soaring for the last 18 months. So what? The Fed, and Chairwoman Janet Yellen, have somehow painted themselves into a corner and all but promised a rate hike. So now, institutional credibility is on the line. More quantitative easing (QE), or lowering interest of excess reserves (IOER), is not even up for discussion.
As you can see from chart above, the dollar has been spiking since mid-2014—a sign the Fed is tightening. Only a prelude? Probably. After all, the Bank of Japan is conducting quantitative easing at $50 billion a month; the ECB has a $1.2 trillion and extended QE program underway, and interest rates have gone negative on the continent; the People’s Bank of China has been loosening for months and letting the yuan fall; and even the Reserve Bank of India has been taking stimulative steps.
Dollar Spike, And Recession?
Given the sluggish global economy, and the actions of other central banks, it seems likely, perhaps even inevitable, that the U.S. dollar will appreciate further in coming months.
Already U.S. manufacturing, a bright spot that helped slowly pull the U.S. out of the 2008 economic debacle, is suffering from a too-high dollar. Next will be tourism, as the U.S., with its decidedly unfriendly borders, becomes too expensive for foreign guests. Here is a pinch from The Wall Street Journal, perhaps a taste of what is to come:
“U.S. factory activity in November fell to the lowest level since the end of the recession, as weak global demand and a strong dollar continued to buffet the manufacturing sector. The Institute for Supply Management said Tuesday that its gauge of manufacturing activity fell to 48.6 last month from 50.1 in October, slipping into contraction territory for the first time since the end of 2012 and notching the weakest reading since the final month of the recession in June 2009.”
Though it is beyond the ken of this post, many financial observers say a higher U.S. dollar will suck “hot money” and capital out of emerging markets, setting off asset plunges and economic havoc there. Just a little side-benefit a higher exchange rate for the dollar.
The Fed should be pondering a rate cut, or a reduction of interest of excess reserves, or a steady QE program, as is underway in Japan. Instead, the Fed is hidebound, backward-looking, fearful and self-reverential, and gravely maneuvering to the trap of a rate hike.
The Fed is choosing the “safest” course politically, perhaps. But dangerous for American prosperity.