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Fed is the headline act and under pressure

Published Monday, September 14th, 2015

The US managed to persuade the G20 not to express any direct concerns in its final communique about the dangers posed by a US interest rate increase and the group even concluded that they were “confident the global recovery will gain speed”. As an exercise in economic public relations it has been a complete failure and only serves to increase concern that the global economy is teetering on the edge of another major setback.

The last week has seen the World Bank and the IMF, amongst others, plead with the Federal Reserve not to increase interest rates in fear that it will pull the rug from underneath an already fragile emerging market situation. The Chief economist of the World Bank warns of “panic and fear” in emerging markets if the Fed raises rates leading to a shock for a world economy that is already in trouble. Even without a rate increase he expects the Bank to lower its growth forecast of 2.8% that was made only 2 months ago.

In the opinion of the head of the IMF “growth is too low, productivity is too low, trade numbers are too low, investment is too low, infrastructure projects are too few and the only thing that is too high is unemployment”. She might also have added that inflation is too low. This is a very damming verdict after so many years of low interest rates and monetary easing. The IMF will also be lowering its global forecast in its next ‘Global Outlook’. No pressure then for Janet Yellen and her colleagues whose mandate is US domestic and limited to delivering the maximum sustainable level of employment whilst maintaining price stability.

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Posted by David Hufton