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When I was listening to Ben Bernanke yesterday afternoon, I went to the Federal Reserve’s Web site to find the policymakers statement. Bernanke said something I wanted to be sure I heard correctly:
Sure enough:
“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.â€
The world was expecting a taper, and the Federal Open Market Committee instead drops the “tightening of financial conditions†bomb.
I wondered exactly what the chairman meant. Is it merely the rise in interest rates? Is it the influence that higher rates are having on the housing market? Or is it something else?
That something else — could it be “international economies?†If you ask Ben, I bet he would admit economies of Europe, China and emerging markets are on shakier footing than the U.S. economy.
But I bet he wouldn’t admit those economies would be directly threatened by a “tightening of financial conditions†brought on by Fed tapering. Because that would imply he’s perpetuating the liquidity pumping for the sake of economies outside the U.S. (Sure, America would eventually be threatened as economic weakness abroad looped back. So he’s got that reasoning going for him.)
Anyway, in searching for his comments about financial conditions, I also came across this article fresh off the presses from The Telegraph: China’s credit boom is spiraling out of control, warns Fitch.
From the story: “Several analysts, including the International Monetary Fund (IMF), have warned that the explosive credit growth that has helped to drive China’s economic rebound also posed a systemic risk to the financial sector.â€
Meanwhile, emerging markets around the world are faced with some ominous combinations of currency, inflation and trade-deficit problems that ultimately will drag heavily on their economies.
Bernanke has assumed an alternate, not-so-enviable, dual mandate: Keep global growth alive and don’t let credit markets spiral out of control.
He seems to be favoring the former. But I hope he can multitask.
Best wishes,
JR
