The US Federal Reserve has jumped the gun. It has mishandled its exit strategy from quantitative easing, triggering a global bond rout that it did not anticipate, and is struggling to control.
It has set off an emerging market shock and risks "blowback" from a fresh
spasm of the eurozone debt crisis, and it is letting all this happen at the same
time, before the US economy is safely out of the woods.
It has violated its own counter-deflation strategy, tightening monetary
policy even though core PCE inflation has fallen to the lowest levels in living
memory and below levels deemed dangerous enough in the past to warrant a blast
of emergency stimulus. It is doing so even though the revival of bank lending
has faded.
The entire pivot by the Federal Open Market Committee is mystifying, almost
amateurish, and risks repeating the errors made by the Bank of Japan a decade
ago, and perhaps repeating a mini-1937 when the Fed lost its nerve and tipped
the US economy into a second leg of the Great Depression. "It’s all about
tighter policy," was the lonely lament by St Louis Fed chief James Bullard.
The Fed seems to be acting in the belief that the US economy will shake off
this year's fiscal tightening - 2pc to 3pc of GDP - and that a housing recovery
is now entrenched. The sharp fall of Wall Street's homebuilders index would
suggest caution. Unlike the surging Case-Shiller index of house prices, it looks
forward, not three months backwards.
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