I am really starting to doubt the credibility of the members of the Federal Reserve. Every serious policy maker should have known and did know that China was overheating this year, especially their stock markets. And predictably, the Chinese stock markets took a severe hit this year. And everyone should have known that such a hit in the Chinese stock markets would expose the excesses and balance sheet weaknesses in their state-owned enterprises. But all along, the heads at the Federal Reserve kept saying that any slowdown in China will not impact the United States’ economy in a significant way – and thereby, given their “reasonable confidence” in inflation and growth projections are met, they would start the normalization of interest rates starting from this year.
China took a hit. Emerging markets started showing signs of slowdown as a result. But this shouldn’t impact the US economy in any significant way, right – as per the Fed? But no! It does suddenly. Now the slowdown in China is dragging global growth down. And now that weakness in global growth has started to impact the inflation and growth projections for the US economy – and this is as per the Fed. Wow! I would have expected such a sudden shift in fundamentals from an under-grad student, but not from the world’s most powerful central bankers.
To make matters worse, different FOMC (Federal Open Market Committee) members come on different TV channels on different days and espouse different policy proposals for the near term monetary policy. Such a confusion and non-alignment in what should have rather been a consensus by now begs one to wonder if the world’s economy is safe with these experts. And by the world’s economy, I literally mean each and every world citizen who has any form of monetary wealth - as the decision by these monetary policy makers has a potential to impact everyone.
The Fed says that they are data dependent, but no amount of data seems to be enough for them to come to a conclusion or a consensus. If they need the data until a day before they make a decision to increase the fed funds rate by 25 basis points (0.25%) to be in sync with their “reasonably confident” projections, then there is something terribly wrong here. Either the data that they are looking at it is not accurate or their communication skills are terrible.
The point is – the Fed doesn’t know where the full employment is. They cannot understand why the core inflation hasn’t picked up even after the unemployment has fallen significantly. To an extent, they correctly blame the lack of fiscal policy support from the US Congress, but beyond that, their mystifying zigzag communication (and probably understanding) is very much disconcerting for a participant in the economy like me, who is just an ordinary person looking forward for a stable global financial growth.