UBS: Economist Insights: Splendid isolation
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?
03.11.2015 | 15:57 Uhr
The British Empire of the 19th century was once described as living in “splendid isolation”, looking to its own interests alone and ignoring the troubles and travails of Europe. Up untilSeptember, the Federal Reserve could have been described in much the same way: living in splendid isolation, focusing on the domestic economy and largely ignoring the turmoil and turbulence of the global economy. But suddenly the FOMC added a line to their monetary policy statement arguing“global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”. For a brief, wondrous interval it looked as if the Fed’s decision on whether to hike depended on how the global economy was doing.
Then just as suddenly, in their statement last week, the Fed removed all reference to the global economy. From splendid isolation to global focus back to splendid isolation, all in the space of six weeks. Why the reversal? It is all down to communication. The market became so focused on that one phrase that it dominated the domestic economy. But this is not what the Fed meant, they simply thought it was worth mentioning that this is one of the factors that they consider. Fed Chair Janet Yellen even felt that she had to curb the market’s enthusiasm, arguing that the committee did “not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be largeenough to have a significant effect on the path for policy”.
It is not as if the Fed did not think about the rest of the world before the September meeting. One just has to look at the staffing. The central Federal Reserve alone has 83 economists and other researchers listed as wholly or partially undertaking research on international economics. And that does not even include all the economists at the twelve regional Federal Reserve Banks. No organisation (even one that can print money) would expend that much time and effort on a subject if they did not think it would ultimately affect their decisions.
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