First published: prospectmagazine.co.uk, 15/09/2015
America is leaning towards a change in the monetary regime
This week, the Federal Open Market Committee, the policy-making body of the US Federal Reserve (Fed), is scheduled to hold a much anticipated two-day meeting. Just weeks ago, there was a common expectation that the Fed would raise interest rates for the first time since June 2006, and initiate a policy tightening cycle for the first time since 2004. A lot of people now working will have no experience of what this looks like, and many more will not remember. But then August happened.
The mishandled Chinese mini-devaluation, and the failed attempt to prop up the Chinese equity market forced people to focus on faltering Chinese economic growth, and its alleged consequences. The UK, US and other major stock markets dropped by 12-13 per cent, though they are now about 3-4 per cent off their low points. Brent oil dropped $10 a barrel to $43, though it too has rallied back to $48. The IMF and World Bank warned about new downside risks to global growth, and advised the Fed publicly not to raise interest rates at the September meeting. Some high profile economists, such as Paul Krugman, Joseph Stiglitz, and Martin Wolf warned the Fed off too. Amid the cacophony of fear, some forecasters crunched their models and predicted another global recession. According to financial betting markets, there is now only a 30 per cent probability the Fed will announce a policy rate increase this week, not least because the Fed rarely likes to surprise financial markets…Read more: