PA ANALYSIS: The Fed has set a dangerous precedent

In holding interest rates at rock bottom this week, the Federal Reserve has set a dangerous precedent which may come back to haunt it, and the global economy.

PA ANALYSIS: The Fed has set a dangerous precedent

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It seems fair to at least ask the question; if the Fed wants to wait for a time when there are no weak points in the global economy, how long will that take? Decades?

The stock market reaction suggests investors are starting to worry that the Fed is running out of credibility, and is now backed into a corner.

Chief economist at Lombard Odier Samy Chaar is one Fed watcher who has concerns that the US central bank has made its own job harder from here on.

“The FOMC also stated yesterday that it is “monitoring developments abroad” and pointed to “global economic and financial developments” as a likely source of near-term drag on activity and inflation,” he said. “As a result, the Fed is now data-dependent on both domestic and foreign conditions, making its task considerably more arduous.”

“Markets can be a fickle thing,” said IG senior market analyst Chris Beauchamp. “Going into last night’s Fed meeting, talk revolved around how damaging a rate hike would be to equity markets. It turns out that no hike can also be rather problematic, especially when accompanied by a sober statement and downgrades to economic forecasts. As a result, stocks moved swiftly into the red this morning and have stayed there all day. Equity bulls have had a difficult month so far, with each apparent rally swiftly knocked back.” 

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