ECONOMICS SEPTEMBER 17, 2015
PREDICTIONS OF A SEPT CRASH FADE
But Dreams of a 2015 Rate Increase Remain
By JC Collins
the announcement by the Fed today of no interest rate increase, the
hopes and fears of a September crash recede into the background noise
from which they came. What we can expect is the same slow grind of
deflation and modest volatility leading into the fall and winter months.
Though nothing the Fed said today would indicate that a rate
increase is off the table for 2015, and could still take place in
international demand on the Fed not to raise rates was coming from all
sectors and regions, including the Bank for International Settlements,
IMF, World Bank, China, and various other central banks and
With a level of domestic justification for a rate
increase, quantified by previous Fed statements on inflation and
employment levels over the last few years (all of which have been
reached), it can be assumed that the lack of international justification
and support influenced today’s decision.
With the restructuring
of the international monetary system high on the agenda of the global
institutions, it is probable that the decision by the Fed today is
signaling that the US is in fact willing to negotiate and facilitate the
development of reforms.
The deadline for the 2010 Governance
Reforms has come and gone with little fanfare. The framework of Plan B
reforms is scheduled to be determined by Sept 30, and implemented by
December 15th. This timeline would correspond with the next FMOC
meeting and decision on rates.
The announcement on the Plan B framework could be announced at the IMF and World Bank meetings in Peru next month.
that time we can expect for there to be further diversification of
reserves, especially from China, and an increase in this diversification
from the European Central Bank. But the real diversification and
substitution will have to take place through an agreed upon framework
and implemented before the Fed raises rates.
This would further
suggest that the Fed is working alongside its monetary partners on
reform, and the delays on the 2010 Governance Reforms is the catalyst
for the restructuring.
The diametric opposition presented by
delaying IMF reforms, which works counter to international demands, and
delaying interest rate increases, which supports international demands,
would strongly suggest that the diversification of USD reserves around
the world is supported by all interested parties.
between managing inflation and increasing interest rates is challenging,
in that if the Fed increases rates too much and too soon, the pressure
on the emerging economies, such as China, to speed up the rate of
reserve diversification will intensify.
reserve diversification will mean a flood of USD coming back into
America, causing higher levels of inflation, which in turn would mean
the Fed would need to increase interest rate even further and harder,
which would cause even deeper reserve diversification.
of international monetary reforms is not to eliminate the USD all
together, but to simply balance the surpluses and deficits between the
major players, and diversify the reserves to more fairly represent the
economic realities of the world.
As such, the dance of interest
rates, reserve diversification, and exchange rates will be sporadic and
random, like a piano tango between mismatched pairs. The delay in
interest rate increases by the Fed is extremely promising in that it
suggest they are willing to work towards stabilizing the international
monetary system, and working towards the meaningful restructuring which
Perhaps the transition from the unipolar dollar
based system to the multilateral system will not be as harsh and
destructive as some of us have considered. – JC