The short-term outlook is unclear. Much would seem to depend on what happens in Washington and Beijing. Usually the decisions of central bankers are driven by domestic considerations. Now policymakers are all too aware of the linkages that bind modern economies together.
The Federal Reserve (the Fed) is clearly concerned about China. Despite signs of recovery at home, the potential impact of the second-largest economy on global growth was a key factor in delaying the decision to raise U.S. interest rates last month.
In Beijing, regulators must sustain belief in the idea of a controlled economic slowdown. If they fail–either in managing China’s shift into a lower gear or people’s perceptions of that process–things could turn ugly, with nasty implications for the rest of the region.
For the record, we would prefer a Fed hike as soon as possible because central bank stimulus is the single biggest distorting factor in the financial markets today. The uncertainty created by the prolonged “will they, won’t they” drama has caused unnecessary turbulence in Asia and is a hindrance to the region’s sustainable recovery.
Market Realist – Central bank decisions are more unpredictable now.
The US economy has been steady for a while and doesn’t warrant the zero interest rate policy. While the employment report wobbled for a couple months, it bounced back, with signs of wage growth. Back in September, the FOMC (Federal Open Market Committee) meeting took place only a few weeks after the global equity market (FAM) mauling, which was a big factor in the decision.
As the graph above shows, Chinese GDP growth has been steadily falling, which has led to a global slowdown, as China is the global growth engine. In September, Janet Yellen was concerned of an “abrupt” slowdown in China, which suggests that the Fed needs more confidence that the slowdown in China (GCH)(MCHI) is “soft” rather than “hard.” But it’s too soon to know that yet.