SOMETIMES one fear trumps another. So it was with the Federal Reserve’s decision last Thursday to hold fire on any US interest rate rise after weeks of speculation that the central bank was about to tighten policy. In the end, however, global worries outweighed domestic considerations and the Fed sat on its hands.
It feels the right decision. The American recovery is strong enough all things being equal to accommodate the first rise in rates since the financial crash.
But the Chinese economic slowdown, emerging market jitters and financial market volatility are currently bigger counters to be weighed in the game. If the Fed lifted rates against this fluid and uncertain backcloth the global domino effect could have been highly damaging, a leap in the dark.
Janet Yellen, the Fed chair, specifically said at the meeting following the bank’s statement that the Fed was alert to the risks of any “abrupt” slowdown in China.
The world’s second biggest economy is now too big a consumer of commodities and other goods to be anything other than a major influence on the fortunes of the West.
Any benefit to America of a rate rise taking a little steam out of its economy would have risked being eclipsed by the potential global economic shock waves. And, in any case, US inflation is virtually zero, like in Britain, while its wage growth is less robust than here.
Although Yellen left on the table the possibility of an American rate rise in 2015, the odds have now shifted, as they have with the Bank of England, to any upwards move not coming before well into 2016. A rate cut in the UK has even been hinted at by BoE chief economist Andy Haldane.
The Fed has only two more meetings this year, in October and December. It is virtually inconceivable there will be any major change in the Chinese and emerging market headwinds over the next month, so we can probably rule out any rate rise next month.
Ditto, but with less certainty, December. The financial markets may have got what they wanted, but that is not necessarily bad news, and this time it looks prudent. The global recovery since the crash has been nurtured for too long now for it to be thrown away with any central bank impetuosity. «