Monday, September 14, 2015

The Fed Shouldn't Worry About Losing Credibility: It Already Lost It

"This Thursday the Fed may or may not hike: either outcome has become a losing proposition. If the Fed hikes, the market will tumble (regardless of the initial PPT and algo-driven spike designed to set the mood that this is the "right thing to do") after the Fed unleashes the next step in the Emerging Markets currency crisis, and the Chinese hard landing goes global. If the Fed does not hike, it will admit all its caveats about data-dependency (in an economy with 5.1% unemployment and a record high number of job openings) was nothing but a lie, and again expose itself as a muppet of the wealthiest market participants.
In other words, perhaps more than concerns about the market's reaction, the Fed may be just as worried about losing any more credibility with a global market where QE has increasingly less impact.
But is it?
As RBS summarizes it, "the Fed’s dilemma is a trade-off between shaking the tree today, risking that volatility and capital flight in EM may ‘spill-back’ into developed economies, or waiting and watching the fault lines deepen. Claudio Borio uses some economist humour to describe the issue: “All this is reminiscent of the old joke about the stranded tourist who, having asked for directions, was told: "If I were you, I wouldn't start from here."


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