Monetary policy U. S.

Fed normalization dilemma

The Fed had the first interest rate hike in last December. Likely the Fed did not fully anticipate the negative impact as a result of the monetary tightening. Stock markets responded by selling off, for example the North American major index was down more than 10% in the early of this year. Second, the U. S. dollar strengthened and this affected profits of the multi-national corporates in the U. S. as evidenced from the latest earning reports. Third, capital outflows from the emerging markets threatened the fragile economies there. These negativities forced the Fed revisiting its monetary course in the global perspective and hence decided to choose “wait and see” method for any further monetary tightening.

The central banks in the rest of the world, however chose to go more accommodative monetary policies, and some areas had gone to negative interest rate policies. The world economies, while growing, are very fragile and are not robust. If there is any unexpected events that disturb the economies, the countries would have very few monetary and fiscal tools to deal with them.

Tomorrow the FOMC will meet to discuss the path forward for the monetary polices. I do not expect many actions from this meeting except a possible hint of a rate hike to happen in June (more likely in July) at earliest.

Although unemployment rates have dropped historically low and job participations are consistently improving, the inflation remains low. It is worrisome that the wage pressure is low which suggest that the employment measures do not give a full picture of the labor market. More troubling news during this earning season came with massive lay off from some large American companies. Economic textbooks tell us that employment has never been a good indicator of economic situations.

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