The US Federal Reserve’s Conundrum

The United States Federal Reserve seems to be caught between the Rock and a Hard place!!! Before the start of Calendar Year 2016, the Fed was on course to raising rates at least 3-4 times by December 2016 and they started their intent with a small raise of 25 basis points i.e 0.25%.  The next increase was supposed to have happened in this month of March 2016 but they developed cold feet due to extraneous developments outside of their realm.  And now Federal Reserve Governer Janet Yellen comes out in public and calls for prudence and caution in raising rates.  Which means, the Fed may raise rates just once instead of the normally envisaged 3-4 times before this year ends L

Now what has changed drastically in the past 2 months is anybody’s guess because the world is pretty much in status quo mode as far as economic recovery and inflation goes.  If anything a few positive developments have happened across the globe i.e 1) The oil prices which had collapsed to a record low of US $ 26/barrel 2-3 months back have since recovered to a more realistic $ 40/barrel, 2) The worst in China seems to be over now and most of Asia (barring Japan) are showing roboust growth and moderate inflation.  Now these are surely not negative developments and that’s why I am unable to fathom Janet Yellen’s reaction L

And to add insult to injury, the equity and currency markets are having the last laugh at the Federal Reserve’s postponement of increasing rates, for they tend to gain the most as long as the interest rates remain either at 0%-0.25% so that they can continue to have cheap access to money for their horrendous vagaries L specifically for speculation in stocks, currencies, commodities, et al thereby creating utter chaos & mayhem in the global markets. 

In the past 25 years of my understanding of the Central Banks across the world, I have never come across such pressure being exerted by various segments of the financial markets on the US federal reserve.  This is truly very sad and disturbing L L.  The reason the markets are exerting so much pressure is due to the fact that for the past 12 years, they have got used to almost 0% rates of borrowing and hence they are now running scared that once the borrowing costs increase, they would not be able to speculate and make hot money in the markets that they have so gotten used to for the past decade or so.

While the Fed needs to be a bit cautious given the fragile nature of the World economy, its primary focus should be on what’s happening in the US. For the past 18 months, the US economy has been quite steady and growing at a reasonable pace as compared to its peers. The unemployment rate too has been quite low for the past 4-5 years though the quality of the employment seems to be now in question J. 

I have been a Economics student all my life and I have never seen people question the quality of the employment as much as they have started doing so in the recent past (4-5 yrs) just to make sure that they put enough pressure on the Fed not to increase interest rates. Talk about a cunning strategy J. 

The main focus of any Central Bank in the world is to focus on Inflation which hurts the common person followed by Growth, etc.  As long as Inflation is under control, the Federal Reserve will be under no pressure to increase rates but once the inflation starts moving up, that’s when it needs to act by increasing the rates.  But sadly instead of focusing on its main issues, the Federal reserve seems to be succumbing to factors that are not in its control eg China Crisis, Oil Crisis, Brexit (Possible exit of Britain from the European Union), et al. 

Probably the Fed can take a leaf out of its Indian Counterpart i.e. RBI which has been steadfast in its goal of focusing on inflation first and then the GDP growth and has been doing a fantastic job since it was founded.  It is this kind of matured functioning of the RBI is what has saved India from the Asian Currency Crisis in 1997 and the latest global turmoil that has been engulfing the entire world since the Lehman Brothers collapse in 2008. 

It is high time that the Federal Reserve starts acting in the best interests of its people rather than listen to vested interests in the market place and create a situation which would not only endanger the US economy but also the world economy at large but might even create chaos across the global markets!!  A steadfast & strong Federal Reserve is what the US and the world needs now!!

Cheers

Sriram