This Week's Focus: Why the Fed did not raise rates?

This Week's Focus: Why the Fed did not raise rates?


After weeks of speculation that September would mark the turning point in the monetary policy of the US Federal Reserve, the decision was to not move anything. In his later statement, aspects such as improving labor market, expectations of increased inflation in the medium term as well as a recovery in consumption and investment were mentioned as positive aspects.

Divergent signals
However, as The Economist recently published indicators that should support a decision to raise rates, no sign at all consistent.

China, behind the decision.
On the other hand, the reference to "recent economic and financial developments (read China)" as factors that can slow economic growth and inflation globally, justified the decision to keep rates at near zero levels.

They also warned that arrivals favorable conditions of employment and inflation that would justify the increase in the intervention rate, could keep them low in an expanding context for a long time. Do not expect a rise in inflation until 2017.

The risk of exporting deflation
According to the recently published in Barron's (Wayne Arnold), China plays a key role in this decision. Although it has been argued and justified that the trade volume between China and the US would have a minimal impact on the case that China fall into recession (the Bundesbank has recently estimated that a 4% drop in China's GDP would decline 0.2% GDP in the eurozone and almost 0% in the US), the fact is that we must not underestimate the possible contagion effect of currency depreciation.

A depreciation of the yuan would have effects in some American companies (Apple, to name the most famous) whose income depends in large part the Chinese market. But what really would impact would be that other Asian exporting countries devaluing imitate the movement. As a result, the USD will appreciate against these currencies, which would reduce the profits of American multinationals and the recession could lead in this way to the US.

Therefore, in the Fed statement "recent economic and financial developments" as the cause of delaying the rate hike, feeds the suspicion that in that delicate balance of global forces that has become our world are cited, China also has to point its potential to export deflation to the world just scares even the US itself.

All roads go through Washington DC
In other words, Yellen must receive something like this message: "your raises rates we (China) devalue the currency, not just slashing corporate profits of your business, going into recession, but exporting deflation to the rest of world. "

The coincidence this week by Chinese President Xi Jinping, and Pope Francisco (important mediator in restoring relations between Cuba and the United States) in their respective journeys to the Americas, may help to improve relations between China and the US, for the benefit the rest of the world. Probably, we have to prepare for a somewhat longer scenario of low rates that many vaticinábamos before summer.