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Austrian Central Bank Warns Fed, "Rate Hikes Will Slow Global Growth"
The World When The Fed Raises Rates
The United States Federal Reserve is the world’s most powerful bank, and its most powerful component is the Federal Open Market Committee (FOMC), the twelve men and women who meet eight times a year to determine – essentially by setting interest rates – the monetary policy of the world’s largest economy. The last time the Fed raised interest rates was in 2006, before the growth-sapping impact of the global financial crisis persuaded it and other central banks to lower rates effectively to zero and to employ so-called quantitative easing (QE) to pump money into advanced economies.
But this year, for the first time since 2007, every advanced economy in the world is growing – including America’s. And that means that the FOMC, fearful of asset bubbles, will at some point decide that America’s interest rates must rise. That may (or may not, depending on the timing) be good for the US economy, but what will it mean for the rest of the world?
Our research shows why the world, especially emerging countries, will be paying nervous attention. In mid-2013, when the Fed announced that it would gradually reduce its unconventional monetary-policy measures (for example, large-scale purchases of mortgage-backed securities), emerging markets suffered large capital outflows. In other words, when the Fed even hints at tightening monetary policy, other countries suffer. Depending on just how much the FOMC decides to tighten at a future meeting, we foresee negative effects on world GDP in the medium term, not only for emerging markets but also for industrialized economies.
Since the Fed started to curb its QE program, there has been constant speculation over just when its current accommodative monetary policy will end. Market participants, be they lenders or borrowers, know that “easy money” has an expiry date. They can see that after three large asset-purchase programs, the Fed’s balance sheet has more than quadrupled since 2007, totaling about $4.5 trillion in February 2015.
However, when assessing what the FOMC intends to do, it is important to bear in mind that the Fed’s mandate is to advance America’s national economic goals. This means that it has to consider not just the desirable rate of inflation (the target is a 2% annual rate), but also the state of the labor market – and its judgment has global implications.
That is why the Fed’s talk in mid-2013 about a gradual exit from unconventional monetary policy led to a so-called “taper tantrum” among investors, triggering a surge in global volatility and a shift in market sentiment against emerging markets. The question now is whether future changes by the FOMC in the federal funds rate (the interest rate at which banks lend each other their overnight money deposited at the Fed) will have similar, or indeed worse, effects.
To narrow any gap between its expectations for the economy and those of the public, the Fed publishes each FOMC member’s view of the range of interest rates that should be expected over the next few years. A member with a positive assessment of the US economy’s growth prospects will expect a rise in the federal funds rate; a pessimist will expect the rate to stay close to zero for a longer period.
Using information released by the Fed in March, we have constructed two scenarios: “lift-off” is based on the maximum projected interest rates, while “delayed lift-off” is based on the minimum. To see the impact beyond America on GDP, consumer prices, exchange rates, and interest rates, we then apply the scenarios to a total of 36 emerging and advanced economies that together account for 90% of global output.
Assuming a phased rise in the federal funds rate to 4% by 2017, we believe that economic growth in all regions except Latin America will slow in 2016, and then slow even more in 2017. The cumulative loss in this “lift-off” scenario is about ten times as large as any lost economic output under the “delayed lift-off” alternative of only minimal changes to rates over the next couple of years.
Our research shows that any monetary tightening by the Fed will affect the rest of the world, but to differing degrees. Those emerging markets that were hit severely during the “taper tantrum” episode – for example, Brazil, Indonesia, and Turkey – will certainly suffer. But the greatest negative impact will be on countries such as Canada and Mexico, which have close trade links with the US economy or those, like Germany, Japan, and Singapore, that are deeply integrated into the global economy.
In other words, though emerging markets – through their dependence on capital inflows – will be at risk when America’s monetary policy eventually returns to “normal,” the same will be true for advanced economies.
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Don't raise rates and instead print. Because I like the face that goes boom.
Assuming a phased rise in the federal funds rate to 4% by 2017, we believe that economic growth in all regions except Latin America will slow in 2016, and then slow even more in 2017.
LOL! All it will take is a Fed Funds Rate at around 2% to bring on a recession.
Bring in Hitlary.... She would lie about it, right?
Because Brazil and Venz need to slow down a little more. Thats great.
Hilarious. This is the same Austrian Central Banksters that thought it was a good idea to give Euro and CHF denominated sub-prime loans to former Soviet bloc nations which were still basically 3rd world countries.
Yeah, I'd listen to their advice. They are brilliant as half their banks are now technically insolvent.
You know you're in a liquidity trap when everyone agrees that raising rates a tiny fraction of a percent off of ZERO is going to ruin everything.
If they had a 50 foot high neon sign that said "Liquidity Trap Here", fireworks blasting into the air above it and half-naked Brazilian chicks dancing all around it, I'm not sure how it could be more obvious.
(I was just thinking about naked Brazilian chicks. You can disregard the rest of my comment, if you want.)
No worries, mate.
I got better odds of seeing Sasquatch than seeing 4% in '17.
Unless you star on "Finding Bigfoot", then, no - you don't. LOL
What about finding squawsnatch? Also very rare but somewhat more likely.
Surely, the end game must be at hand if a fucking quarter of a percentage point hike in the US equates to worldwide financial armageddon.
Austria has certainly become whiny and if they bought into the FED bullshit, that's their problem.....
The fact that US credit ratings stooges haven't downgraded US credit yet is unbelievable.
It's a circus.
Enjoy the clowns.
Enjoy the bread, too.
NO consideration given to the US Treasury dump by just about every foreign holder.
And they have the nerve to point fingers at Brazil today.
LOL!
S&P, Moody's, and Fitch = Moe, Larry, and Curly.
"Rates" are much akin to "markets" these days...
Let me be clear, a refund or retribution is coming, period.
Guess which one my tribe and I are banking on motherfuckers?
No worries over there in Austria, the Fed is lying to the world, they cannot raise rates without collapsing the interest rate derivative contracts held by other tribal members and who do you think you are kidding??.... there is no organic global growth it’s all printed fraud.
What growth?
Exactly cheech ...If raising rates (1/4%) will slow groth , then should not cutting rates spur growth? Oh wait a minute we have already cut rates to ZERO with little growth.
Maybe "rates" ain't the problem. Maybe money printing is the problem. maybe the Banks who are 1st in line for the money from money printing are the problem.
Hey central banks ...whaddaya think about that?
The Fed is really struggling to figure this one out...they did not have a problem cutting rates by .25% numerous times in the past... maybe they found out that it is harder to climb a hill than to go downhill...I guess that's why you need a Phd in economics to run the Fed...
if the fed raises rates it means there is economic growth, (it says so in their charter) when they dropped rates in 2008 it was because there was no economic growth. so its all pretty straightforward rate raise means good news, rates fall mean the fed has your back with qe.but since nothing the fed can do is bad, then nothing they can do is good either, there is no moral imperative. for a long time they have had low rates now its time to raise them. this is like a bunch of monkeys looking at the moon through a telescope and talking about astronomy. the huge debt overhang will swallow them up, and then the IMF will ride to the rescue. rates dont matter
Once again, if the economy cannot withstand an interest rate of .25%, absolutely nothing is fixed and asset prices are too high.
How much longer before what the Fed says (or does) becomes meaningless...?
Rate hikes? fukn lol is all need be said.
Fed is Dead, spread it around folks.
"Rate Hikes Will Slow Global Growth" Little late for that assholes.
Biggest Unerstatement Ever
The Austrians left their School long ago and, as Keynesians, they ignore what even Keynes said, "When the facts change, I change my mind." With the third bubble they've made but can't see about to pop, they really need to change their minds.