The Federal Reserve’s ‘Uh Oh’ Moment Has Already Arrived

The Federal Reserve seems to have been caught off-guard by the recent turmoil on the markets. As the Chinese economic growth seems to be slowing down, all of the Western central banks need to re-think their plans, and the Federal Reserve will have to kneel in the dust.

Whereas just a few weeks ago, the Fed ‘promised’ the markets it would increase the interest rates 4 times in just twelve months, the central bank is already reneging on its promise as it no longer thinks it will be able to do so without completely suffocating the economy. As we explained in a previous column, the use of some specific words when the original rate hike was announced indicated to us the Fed was actually anticipating the markets might not be ready for more rate hikes just yet.

This has now been confirmed by Robert Kaplan, the president of the Dallas Fed. In one of the most recent statements of the Federal Reserve, the central bank has no longer used the word ‘balanced’ to describe the potential risks to the US economy, and Kaplan has now confirmed this was caused by the bank no longer willing to trust its own expectations and projections.

The implications of this news, you ask? Well, they are huge. First of all it does indicate the American economy (and the world economy) is in a worse shape than one would have anticipated. The muscle-flexing of the Federal Reserve is now really blowing up in their own faces. This updated view was obviously also influenced by the Bank of Japan which has now introduced a NIRP. A Negative Interest Rate Policy.

Source: tradingeconomics.com

That’s absolutely unheard of for any central bank in a civilized country, and Japan seems to be desperate to try to get its economy going again, even though the interest rates have been low for the past few decades. As you can see on the previous image, Japan has had an interest rate close to zero for the past 20 years, and that hasn’t helped the country too much. That’s also one of the main reasons why we didn’t expect the zero interest rate policy of the Federal Reserve to be very helpful.