Friday, September 18, 2015

Fed Inaction Reinforces Global Economy Worries

The Fed interest rate action, keeping rates at zero for at least another month, did not provide much cheer to stocks in China, which were up less than 1 percent today. Stock markets globally are, in general, down sharply as traders digest the news, and now North American markets are also pointing down. Traders look at both the effects and the implications of any Fed move, and in this case, both are ugly. The crisis footing of the artificially low rates stifles workers and businesses alike and encourages safe, slow-yielding capital investments over faster, more innovative ventures. At the same time, the failure to raise rates as previously signaled tells us that the Fed believes the global economy is in a perilous state. There was nothing in the commentary from the Fed to take away that impression.

The global economy does face difficult changes ahead if indeed the world is starting to move away from manufactured goods. There is nothing about that transition that should provoke a crisis, but there is also no historical precedent that might serve as a road map. If the manufacturing transition is not a crisis in itself, the fear and uncertainty surrounding it could trigger a crisis along the way.

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