Yellen’s Fed Cavalry Low on Ammo as Global Concerns Spread By Rich Miller - 17 ธ.ค. 2557 02:57:48 This time, the Federal Reserve may not be able to ride to the rescue. Alan Greenspan played the hero when Russia last rocked the world economy back in 1998. With three well-timed interest rate cuts, the Fed chairman restored order to financial markets that had been knocked awry by Russia’s currency devaluation and debt default. Russia is again front and center for investors after its central bank raised its key interest rate by the most since the crisis of ’98 after a plunge in oil pricesspooked markets. Current Fed Chair Janet Yellen doesn’t have the same firepower her predecessor had to calm investors if the panic spreads and threatens the U.S. and global economies. The central bank can’t cut interest rates any further after reducing them to effectively zero in December 2008. It could resort to asset purchases again, though that quantitative easing strategy remains controversial within the central bank and has been attacked by Republican lawmakers as potentially inflationary. Ray Dalio, who runs the investment firm Bridgewater Associates LP, is among those who have voiced worries about the Fed and other central banks running out of options to stimulate their economies, though he told a conference on Dec. 11 that he sees that as more of an issue in a year or two than now. Effectiveness Waning “If global forces create a significantly adverse set of conditions, central banks around the world might find themselves struggling to apply an appropriate response,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago and a former Fed official. “Most major central banks have used quantitative easing quite extensively over the past five years and many think that tool has reached the edge of its effectiveness.” Fed staff members, too, recognize that the central bank is constrained from acting to offset a blow to the economy. They believe that monetary policy doesn’t appear “well positioned to help the economy withstand adverse shocks,” according to the minutes of the central bank’s last meeting on Oct. 28-29. To be sure, the situation today is not nearly as dire as it was in 1998. Russia’s default in 1998 came after a year of rolling crises that began in Thailand and spread throughout Asia and the rest of the world. The turmoil brought hedge fund Long-Term Capital Management to the brink of bankruptcy, necessitating a Fed-orchestrated rescue of the firm. “We are nowhere close” to conditions in 1998 when U.S. equity markets were falling and growth was “crumbling” in both Russia and Asia’s emerging markets, Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York, said in a note to clients today. Fed’s Meeting At their two-day gathering starting today, central bank policy makers will be discussing when to start tightening policy, not about easing their stance. Up for consideration: whether to drop their stated intention to hold short-term interest rates near zero for a “considerable time” after they ended their asset-purchase program in October. More than two out of three economists surveyed by Bloomberg last week forecast that the Fed will junk that phrase and instead adopt a word such as “patient” to describe its approach to tightening policy. The meeting is taking place after a series of government reports showing that the U.S. economy is thriving. Payrolls rose by 321,000 last month, the biggest increase in almost three years, while retail salesincreased 0.7 percent, the most in eight months. The economy also was strong back in 1998, with gross domestic product climbing at a 5.3 percent annualized clip in the third quarter as the Russian crisis hit. That didn’t deter Greenspan from acting -- though, with interest rates at 5.5 percent, he had a lot more room to maneuver than Yellen has now.
Posted on: Wed, 17 Dec 2014 10:12:11 +0000
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