Turkeys voting for Christmas, or a welcome dose of pragmatism ?

Thursday 10th September 2015

Turkeys voting for Christmas, or a welcome dose of pragmatism ?

 Ref :  "Act now : Emerging markets call on Fed to lift rates and end uncertainty" , The Financial Times, p.1

No apologies for looking yet again at the "Great Rate Debate" : it's by far the biggest game in town and fundamentally affects just about everything else we might examine.

Two days ago the chief economist of the World Bank, Kaushik Basu, called on the US Federal Reserve to refrain from raising rates in September. In doing so, he joins the IMF and countless high-profile analysts and commentators who take the view that a hike would throw global markets back into panic and turmoil, and pummel already-battered emerging markets in particular. But yesterday the call came for the Fed to stop pussy-footing around and get it done came from .... yup, emerging markets.

Actually, Mirza Adityaswara of Indonesia's central bank said that he thought US policy makers had got confused about what to do and it was that uncertainty that had caused the turmoil. Similar thoughts have been voiced recently by central bankers in Peru and Mexico, though one could point out that a rate hike that reflects a strengthening US economy might appeal to Mexico more than most, given its trade dependence on its northern neighbour. Certainly, a great many emerging markets would view Fed action sooner rather than later in a less positive light than Mr Adityaswara, but it seems to us that he's making a valid point about the uncertainty inaction has engendered.

Markets HATE uncertainty ..... speculation ahead of expected "bad news" can often have more damaging effects than its confirmation. This has as much to do with psychology as economics. If that seems too woolly a concept for some, try substituting the word "confidence" for "psychology". The argument goes that the endless debate (oh, so endless !) about whether the Fed will move next week has done nothing to soothe markets. If they don't act, the same kind of focus will be placed on December and at least some degree of uncertainty will remain. Most likely, an early move would see some pretty nasty short-term reactions, but wouldn't it be better to get them out of the way and have the markets know where they stand ?

Interestingly, another article in today's FT (Emerging markets braced for ripple effect, p.6) firmly puts the well-versed and very valid case for postponing hikes  --  capital outflows, depreciating currencies, dollar-denominated debt etc). And we should note that the odds-makers put the probability of a September move at 28% against December's 54% . But a devil's advocate might ask how much will have changed by December ? And having repeatedly signalled to the world that they would act this year, the Fed's credibility would really take a pasting if it didn't act then even if the global economy was in the same precarious position it's in now.

Fed Chairwoman Yellen has no shortage of voices (particularly Stateside) urging her to move next week, reminding us all (again) that in law the Fed's brief is a domestic one and that it is not its job to support asset prices, either at home or elsewhere. Of course we all know that it's not that simple --  these are precarious times. But it is fascinating to hear calls for the Fed to bite the bullet coming from unexpected quarters.

NOTE :  The number of US job vacancies rose 430,000 in July, to 5.75m  (expected 5.3m)  --  the biggest gain in five years. This number has a lower profile than last week's employment data but is reportedly closely watched by Ms Yellen, and will certainly give her food for thought.