$1.4 trillion of Chinese
stocks have stopped trading. Greece is finally imploding. The US trade
deficit is widening on falling
exports.Copper just fell
back to 2009 levels. And safe-haven capital flows are revving up again,
with Swiss 10-year bonds once again trading with negative yields.
Yet somehow a majority of economists and money managers continue to believe
that not only will the fed hike rates at its next meeting, but that it should do
so.
The IMF isn't normally the voice of reason on major financial issues, but
in this case -- perhaps because it has its hands full with Europe -- its caution
seems appropriate:
WASHINGTON--The Federal Reserve risks stalling the U.S. economy by raising
interest rates too early, the International Monetary Fund warned Tuesday as
it detailed further its call for the central bank to delay a move until 2016.
The IMF's push for a delayed rate increase is at odds with the current signals
Fed officials are sending for a move later in 2015. Last week's job numbers
bolstered the Fed's plans to increase short-term rates in the months ahead.
The IMF, which cut its growth forecast for the U.S. last month, said the
Fed could be forced to reverse course next year if the central bank proves
overly optimistic about the health of the American economy. IMF staff argue
that, barring upside surprises, there is still too much uncertainty around
inflation, employment and wage prospects for the Fed to pull the trigger
in coming months.
"Raising rates too early could trigger a greater-than-expected tightening
of financial conditions due to some combination of a further upward swing
in the U.S. dollar, lower equity prices, and/or a repricing of risk premia
and the yield curve," the IMF said in its detailed annual analysis of the
U.S. economy.
"There is a risk that the tightening impact on the economy could go well
beyond the initial [0.25 percentage point] increase in the fed-funds rate,
creating a risk that the economy stalls," fund staff said.
A policy U-turn wouldn't be without precedent. Both the European Central
Bank and Sweden's Riksbank were forced into rate reversals in 2011, and the
Bank of Japan seesawed through rate moves in the 1990s and 2000, fund economists
noted.
Such an about-face puts the Fed's all-important credibility at stake, the
IMF said.
The emergency lender also said the crises in Greece and Ukraine represent "unpredictable
wild card" risks to the U.S. economy. So far, the impact in U.S. markets
from the Greek crisis has been limited. The country has little direct exposure.
But if it deteriorates further, it could hit broader European growth, which
could weigh on the U.S. recovery.
Weaker global growth or a faster slowdown in China could also hit the U.S.,
sparking a selloff in equity markets, the IMF said.
"Weaker global growth" indeed. The next two charts show GDP growth for Japan
and Germany. Note that they're both positive (barely) but are also lower than
the previous year. So momentum was already slowing before Greece blew up and
China's stock bubble burst.
For the world's biggest economy to respond to the above with steps to slow
down its growth would be at best ill-mannered and at worst the kind of slap
in the face that sets off global contagions. So yeah, it's kind of hard to
imagine.
