Fed Hike Will Unleash "Panic And Turmoil" And A New Emerging Market Crisis, Warns World Bank Chief Economist

If it was the Fed's intention to make the upcoming rate hike seem like a welcome event, one that presaged a new Golden Age in the US (and global) economy because, lo and behold, the wise Fed would never hike unless the economy is flourishing and thus create a self-fulfilling prophecy in which the rate hike itself - an event of tightening financial conditions even when inflation expectations are the lowest they have been in years - becomes a catalyst for growth, then it has failed spectacularly.

First, it was the IMF warning a rate hike would be a big mistake, then Larry Summer (who for some reason progressives thought was hawkish when it was a choice between him and Aunt Janet), then even China got into the fray saying the Fed should delay its rate hike as it could push emerging markets (such as China) into crisis.

But it wasn't until today that we got the most glaring confirmation there had been absolutely zero coordination at the highest levels of authority and "responsibility", when the World Bank's current chief economist (a position previously held by such 'luminaries' as Larry Summers, Joseph Stiglitz and Stanley Fischer), Kaushik Basu warned that the Fed risks, and we quote, triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.

While apparently the World Bank economist is unfamiliar with the concept of reflexivity, and does not understand that the only reason the global economy is not on "surer footing" is because of the 12+ month , near endless pricing in of the Fed's first rate hike since 2006,  which has unleashed an unprecedented capital flight out of all emerging markets, a record series of rate cuts across the globe including NIRP in Europe, and China's first official currency devaluation in years not to mention the first stock market correction in 4 years, what is critical is that by making this statement, Basu destroys with just two words the narrative that i) the Fed knows what it is doing and that ii) contrary to logic, a rate hike at a time when the world clearly and desperately needs, and is addicted, to global central bank liquidity, will lead to even further asset price plunges.

In fact, Basu may have just admitted, in not so many words, that Deutsche Bank's sinking feeling that the Fed's rate hike is nothing but a "controlled demolition" of the market, one which would send global equities 20-40% lower, is spot on.

This is what else Basu told the FT:

Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences.


His warning highlights the mounting concern outside the US over the Fed’s potential “lift-off”. It follows similar advice from the International Monetary Fund where anxieties have also grown in recent weeks about the potential repercussions of a September rate rise.


That means that if the Fed’s policymakers were to decide next week to raise rates they would be doing so against the counsel of both of the institutions created at Bretton Woods as guardians of global economic stability.

And just in case casually tossing the words "panic in turmoil" was not enough, Basu decided to add a few more choice nouns, adding a rate hike "could yield a “shock” and a new crisis in emerging markets... especially as it would come on the back of concerns over the health of the Chinese economy that have grown since Beijing’s move last month to devalue its currency."

He said that, even though it had been well-advertised by the Fed, any rise would lead to “fear capital” leaving emerging economies as well as to sharp swings in their currencies. The likely strengthening in the dollar would also hamper US growth, he said.

Finally at least one person in a position of authority realized just what Quantitative Tightening means:

“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” Mr Basu said. “It is the compounding effect of the last two weeks of bad news with that [China devaluation] . . . In the middle of this it is going to cause some panic and turmoil.

Precisely, and as a reminder between the Fed's tightening and China's QT, the world would suddenly find itself starting at a finacial liquidity abyss, and abyss which for Deutsche Bank means the S&P could trade at "half its value."

His conclusion: "The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly,” he said.

And if someone should know (clearly not the Fed whose predictions have become the butt of all jokes even for tenured economists), that would be the chief economist of the World Bank.

But fear not: recall that over the weekend Goldman made it very clear that a September rate hike (and maybe December) is not coming. And what Goldman wants, Goldman always gets, even if it means the Fed ends up losing all credibility in the process.

Finally, just in case there is still any confusion what a Fed rate hike means, we repeat what Bank of America said last week:

Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.


As noted above, a rate hike with a stroke ends this era.