Friday 13 November 2015
The Federal Reserve should raise the target fed funds rate at its December meeting
Central Bank Watch
Employment numbers in the U.S. suggest that the country is at near full
employments levels. There is some evidence appearing of wage increases.
GDP continues to grow steadily at about the 2% level, less
than the trend growth of about 3% before the 2008 financial crisis. Inflation
continues to run below the Federal Reserve’s target of 2%. This looks like the
‘new normal’. Note the expansion in the US economy post-crisis is now one
of the longest in US since 1900.
The situation in China is currently stable. The government
recently announced that families would be permitted to have two children.
China’s central bank announced another round of easing. There is a shift in the
economy from investment to consumption.
The Federal Reserve now needs to start normalising interest
rates in the U.S. At 1.5% inflation, the fed funds rate would normally be in
the region of 2.5 to 3%. Keeping interest rates unusually low for extended
periods will create major distortions in the U.S. economy and the rest of the world. Please read this paper by Paul
Mason on this subject.
To get to a fed funds rate of 2.5 to 3%, the Federal Reserve
needs to do it in gradual steps over the course of the next two years. The
sooner it starts the better.
A China or an emerging markets shock is still possible. If
the Federal Reserve believes it needs to respond to it, it can when interest
rates are at the normal level. Similarly the Federal Reserve can respond to a
recession in the U.S. – a recession can well be on the cards in the next two
years after one of the longest expansions in U.S. history.
Monday 2 November 2015
Monitoring the NaMo Bull Market in Stocks: Update as of October 2015
Indian Stock Market Watch
Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether the market is cheap or expensive.
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