The Federal Reserve in the US seems to be caught between the
Rock and a Hard place!!! Before the start of Calendar Year 2016, the Fed was on
course to raising rates at least 3-4 times by December 2016 and they started
their intent with a small raise of 25 basis points i.e 0.25%. The next increase was supposed to have
happened in this month of March 2016 but they developed cold feet due to
extraneous developments outside of their realm.
And to add insult to injury, the equity and currency markets are having
the last laugh for they tend to gain the most as long as the interest rates
remain either at 0%-0.25% so that they can continue to have cheap access to
money for their horrendous vagaries i.e. specifically for speculation in stocks, currencies, commodities, et al thereby
creating utter chaos & mayhem in the global markets.
In the past 25 years of my understanding of the Central
Banks across the world, I have never come across such pressure being exerted by
various segments of the financial markets on the US federal reserve. This is truly very sad and disturbing :-(. The reason the markets are exerting so much
pressure is due to the fact that for the past 12 years, they have got used to
almost 0% rates of borrowing and hence they are now running scared that once
the borrowing costs increase, they would not be able to speculate and make hot
money in the markets that they have so gotten used to.
While the Fed needs to be a bit cautious given the fragile nature of the World economy, its primary focus should be on what’s happening in the US. For the past 18 months, the US economy has been quite steady and growing at a reasonable pace as compared to its peers. The unemployment rate too has been quite low for the past 4-5 years though the quality of the employment seems to be now in question :-(.
I have been a Economics student all my life and I have never
seen people question the quality of the employment as much as they have started
doing so in the recent past (4-5 yrs) just to make sure that they put enough
pressure on the Fed not to increase interest rates. Talk about a cunning strategy :).
The main focus of any Central Bank in the world is to focus
on Inflation which hurts the common person followed by Growth, etc. As long as Inflation is under control, the
Federal Reserve will be under no pressure to increase rates but once the
inflation starts moving up, that’s when it needs to act by increasing the
interest rates. But sadly instead of
focusing on its main issues, the Federal reserve seems to be succumbing to
factors that neither in its control eg China Crisis, Oil Crisis, Brexit
(Possible exit of Britain from the European Union), Commodity Meltdown, et al.
Probably the Fed can take a leaf out of its Indian Counterpart
i.e. RBI which has been steadfast in its goal of focusing on inflation first
and then the GDP growth and has been doing a fantastic job since it was
founded. It is this kind of matured
functioning of the RBI is what has saved India from the Asian Currency Crisis
in 1997 and the latest global turmoil that has been engulfing the entire world
since the Lehman Brothers collapse in 2008.
It is high time that the Federal Reserve starts acting in
the best interests of its people rather than listen to vested interests in the
market place and create a situation which would not only endanger the US
economy but also the world economy at large but might even create chaos across
the global markets!! A steadfast &
strong Federal Reserve is what the US and the world needs now!!
Cheers
Sriram
