The Federal Reserve is not an advocate of mystery – quite the opposite. Its default position is to reveal all to the market, the only problem being that the market's faith in the Fed's revelations is distinctly shaky. And when it comes to monetary policy, one could go as far as to say, the logic of the market is at odds with the logic of the Fed. Maybe the Fed should reveal less and surprise more.
„Wir rechnen mit einer Leitzinserhöhung zur Jahresmitte. Doch ob es angebracht ist, im Juni die Zinsen zu erhöhen, dürfte eine knappe Entscheidung werden. Dabei dürften auch die Bedenken des Federal Open Market Committee hinsichtlich der systemischen Risiken eine Rolle spielen, die vom Referendum über einen Brexit ausgehen“, sagt David Page, Senior Economist bei AXA Investment Managers.
The Fed is worrying again about the ongoing deceleration of China's economy and the possible ramifications of a hard landing for the global economy. The trade channel is the most obvious one through which a Chinese hard landing would be transmitted to the rest of the world. But since the direct trade exposure of developed markets to China is relatively limited, why are the markets and the Fed so worried?
Does the Fed lead the market, or does the market lead the Fed? Who is in charge? The old adage may say never fight the Fed, but the Fed's critics would suggest it may be more a case of the Fed not wishing to fight the market. The Fed would disagree; after all they are both looking at the same data. But neither the Fed nor the market have been that good at forecasting the data in any case.
When the US Federal Reserve chose not to hike rates in September, the market zoomed in on the one line expressing the Fed’s sudden concern about the wider global economy. Suddenly a rate hike in December was deemed unlikely. Then last week the Fed reversed course and went back to its usual domestic focus. But is the data pointing to an altogether different scenario?