viernes, 28 de agosto de 2015

viernes, agosto 28, 2015

Review & Outlook

A Fine Fed Mess

Are financial assets falling to match the slowing real economy?

Aug. 21, 2015 6:51 p.m. ET


The Federal Reserve is debating whether to fulfill its pledge to finally begin raising interest rates off zero in September, and the markets are throwing a fit. Wall Street and many in the political class are begging the Fed to stand down, and the Fed has only itself to blame for its economic and political predicament.

Global stocks have taken a beating this week, and as always the question is whether the selloff is a temporary correction or a harbinger of bigger problems. U.S. equities have risen for six years with few breaks, and the recent market declines are merely 10% or so off their recent top. A larger correction might even be useful if it reminds investors that stocks can’t rise forever if the real economy remains sluggish.

On the other hand, sluggish might flatter this economy. Global growth has slowed, and that’s hurting U.S. growth. China is decelerating, Europe is growing but not very much, and Japan isn’t taking off.

Slower growth is reflected in falling commodity prices, notably in oil, which dipped below $40 a barrel on Friday for the first time since 2009. But nearly every major commodity price is also off.

The U.S. is still growing, but corporate profits are far from booming. Growth in the first half of the year came in at a paltry 1.5%, and so far the third quarter doesn’t look like it will rebound as smartly as it did in 2014. To put it another way, the long promised economic takeoff to a faster growth plane above 3% a year is still receding like a desert mirage.

One lesson here is that the Fed’s great monetary experiment since the recession ended in 2009 looks increasingly like a failure. Recall the Fed’s theory that quantitative easing (bond buying) and near-zero interest rates would lift financial assets, which in turn would lift the real economy.

But while stocks have soared, as have speculative assets like junk bonds and commercial real estate, the real economy hasn’t. This remains the worst economic recovery by far since World War II, and we’ll be watching to see if financial assets now fall to match the slow real economy.

Nearby we reprint our table comparing GDP growth projections by the Fed’s governors and regional bank presidents to the actual results. Every year without fail they have predicted faster growth that never materializes. Fed policy was also supposed to raise inflation to its target of 2% a year, but it has failed even that test.

To be fair to Fed officials, forecasting is hard and they rely on the Keynesian models of the Fed staff. But there’s no denying that the economic expectations of Fed Chairs Ben Bernanke and Janet Yellen have been consistently wrong.

The same monetary lesson applies to the rest of the world. Bond buying and near-zero rates spread around the globe in imitation of the Fed’s post-crisis policy, but the global economy also hasn’t responded with faster growth. The European Central Bank’s bond buying may have prevented a recession but European growth is still anemic.

Meanwhile, the emerging-market economies that benefited from capital inflows during the height of QE are now seeing those flows and economic growth recede. China is trying to clean up its stimulus excesses without going into recession.

The question for the Fed now is whether it has missed its opportunity to get off the zero bound.

The economy survived, and even accelerated, as the Fed tapered its bond purchases two years ago. At any time in the last two years the Fed could also have comfortably begun to raise rates while the economy was strong enough to adjust. But it always lacked the nerve.

The monetary doves will say thank heaven the Fed didn’t move given the slowing economy, but if it had moved earlier it would now be better positioned to weather whatever economic storm is ahead.

An earlier return to monetary normalcy would have reduced the Fed’s outsized role in allocating capital, while reducing the risk of financial instability by letting asset prices adjust more gradually. Growth would likely have been faster.

Instead the Fed now finds itself caught between a slowing global economy and its promise to begin normalizing rates this year. The chattering financial classes are once again shouting at the Fed to stand pat, and more than one Fed president has joined that chorus. One result has been to increase economic uncertainty and market volatility.

It all adds up to one fine mess of the Fed’s own making. Our own view is that this is what comes of relying on monetary policy as the only policy engine for economic growth. At the very least it’s time for the Fed to examine why its policies have failed to deliver the buoyant economic results it promised.

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