Emerging Market Collapse Will Push Fed Back To QE Mode
The US Fed will return to pumping more money (QE) into the global financial system as the world economy stalls and emerging market stocks collapse.
“We are on the precipice of a liquidation in emerging markets like Q-4 of Y 1997. The Fed would eventually be pushed into a 4th round of QE to shore up the economy.
Recall that in Y 1997, emerging markets in Asia were forced to devalue their currencies as they ran out of foreign currency reserves to support exchange rates. The contagion spread to US markets with the DJIA falling 7.2% in 1 day.
The International Monetary Fund (IMF) bailed out countries including Thailand, South Korea and Indonesia. Global markets are showing similar signs of instability.
The liquidity of everything could be taken down, as the market discovers just how much liquidity is actually in the market.
The Fed has held rates at Zero+ since December 2008 when the US economy declined the most since the Great Depression. The following frame of weak growth pushed the central bank into several rounds of QE (quantitative easing), read: buying bonds on the open market to pump more cash into the banking system. On the theory that lower interest rates make it cheaper to borrow, which can help to boost spending and investment.
The FOMC on 17 September decided to hold rates at Zero+, sending the S&P 500 down 7.57% so far, an indication that the central bank had lost credibility among participants. Its statement cited concerns about “recent global economic and developments” without mentioning China’s stock market fall and slowing growth, which added more layers of complexity for analysts to fathom.
A coming economic decline may push the Federal to set interest rates below Zero, read: banks would be charged for holding cash at the central bank in an attempt to revive growth.
That would mean replacing Zero+ interest rate policy, or ZIRP, with negative interest rate policy, NIRP.
Stay tuned…
HeffX-LTN
Paul Ebeling
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