Today’s market declines have a lot of people wondering if the Fed didn’t make a mistake yesterday by leaving rates unchanged. Here are some good thoughts from a trader in Asia who I really respect. He says the Fed made a mistake yesterday with their policy decision and delivery:
Their message was that some improvement in the US economy would elicit a hike. We got the improvement but they moved NAIRU and more tellingly emphasized the risks that are building in the emerging economies. While it is true there is slowing in China and Asian EM economies for various reasons, the Fed by not hiking and signaling an extended pause has retained the hike risk and shown a greater degree of concern about the slowdown in China than arguably the Chinese have.
They have damaged sentiment and kept the threat of a hike hanging over EM. This will do nothing to encourage inflows back into EM and will only prolong the tightening of financial conditions.
A 25 bp hike and dovish signal via the dots and press conference would have been the optimal policy response.
This was a common refrain today and I can’t really argue with that since he’s on the ground in Asia where this debate is centered. But I do wonder if we aren’t all making way too much about this 25 bp rate hike. After all, financial conditions eased a bit in the last two days as breakevens rose and yields fell across the board. But even these were small changes in the grand scheme of things.
Personally, I wouldn’t read too much into one FOMC meeting or a few days worth of trading. We’ve all made WAY too big of a deal about this interest rate change for the last few months and the likelihood is that this isn’t going to move the needle too much one way or the other. After all, if there’s one thing we’ve learned in the last 7 years it’s that interest rate policy hasn’t been very powerful to begin with so 25 bps is probably inconsequential anyhow.