The US Federal Reserve has jumped the gun. It has mishandled its exit strategy from quantitative easing, triggering a global bond rout that it did not anticipate, and is struggling to control.
That the Fed should tighten even as it cut its own growth and inflation forecasts for this year is a bizarre state of affairs Photo: Getty Images
It has set off an emerging market shock and risks "blowback" from a fresh
spasm of the eurozone debt crisis, and it is letting all this happen at the
same time, before the US economy is safely out of the woods.
It has violated its own counter-deflation strategy, tightening monetary policy
even though core PCE inflation has fallen to the lowest levels in living
memory and below levels deemed dangerous enough in the past to warrant a
blast of emergency stimulus. It is doing so even though the revival of bank
lending has faded.
The entire pivot by the Federal Open Market Committee is mystifying, almost
amateurish, and risks repeating the errors made by the Bank of Japan a
decade ago, and perhaps repeating a mini-1937 when the Fed lost its nerve
and tipped the US economy into a second leg of the Great Depression. "It’s
all about tighter policy," was the lonely lament by St Louis Fed chief James
Bullard.
The Fed seems to be acting in the belief that the US economy will shake off this year's fiscal tightening - 2pc to 3pc of GDP - and that a housing recovery is now entrenched. The sharp fall of Wall Street's homebuilders index would suggest caution. Unlike the surging Case-Shiller index of house prices, it looks forward, not three months backwards.
The Fed could have kept policy steady, welcoming the shake-out in frothy
markets over the past month as a useful "fire-drill" for future QE exit,
without pushing its point too far. It chose to escalate.
