In World Economy News 29/01/2016
Weak data, such as Thursday’s durable-goods-orders report, signal that the Federal Reserve made “a major macro mistake” raising interest rates in December, said Danny Blanchflower, a Dartmouth College economist.
In December, not only did the Fed raise rates for the first time in nine years, but they signaled there would be four more hikes this year.
Now, “there’s a 50/50 chance the next move is a cut…as with all the other rate hikes since 2009 this one will have to be reversed,” Blanchflower, who leans dovish, said in an interview.
Traders who bet on rate hikes using fed funds futures contracts are now wagering that the Fed will next hike rates in September, according to CME FedWatch.
“The Fed has seriously lost credibility. No one believes them,” Blanchflower added.
The Fed’s ‘classic” mistake has been to underestimate the negative spillovers from the slowing of China, the worlds number-two economy, he said.
The Dartmouth economist, who was a former member of the Bank of England’s monetary policy committee, said the situation reminded him of 2008 when the U.K. thought it could avoid the subprime housing slowdown in the U.S. economy.
Blanchflower cited new figures in a Bloomberg article pointing to a steep slowdown in global trade.
In addition, the U.S. central bank doesn’t yet grasp that the decline in oil prices is not a positive supply shock but a signal of weak global demand, he said.
In its dovish policy statement released Wednesday, the Fed took out any reference to the balance of risks facing the economy, after saying in December that the risks were balanced.
“That’s a big admission of a mistake,” Blanchflower said.
In its statement, the Fed said it “is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
Economic indicators are now pointing in the direction of a recession, Blanchflower said.
