After raising rates, Fed faces darker global economy
WASHINGTON — Since the Federal Reserve raised interest rates from record lows last month, the global picture has darkened. Stock markets have plunged. Oil prices have skidded. China’s leaders have struggled to steer the world’s second-
All of which raised a delicate question: Did the Fed err in raising rates for the first time in nearly a decade?
Don’t expect the central bank to answer or even acknowledge that question when it issues a statement after its latest policy meeting ends Wednesday. But in their meeting, the Fed’s policymakers will surely grapple with whether to respond to an altered economic landscape.
Change: No one thinks the Fed will suddenly reverse course and roll back the quarter-point increase in its key short-term rate it announced Dec. 16. But some analysts say the Fed might signal that the pace of three or four additional rate increases that many had expected this year could become more gradual — with perhaps only two rate hikes this year and not starting until midyear.
“People are just scared right now,” said David Wyss, a former Fed staff economist and now an economics professor at Brown University. “It isn’t just China weighing on things. Europe hasn’t solved its problems, we have geopolitical risks in the Middle East, and in the United States there is a lack of confidence in the political parties and the candidates.”
Market: The most visible sign of the economic fear has been the sharp fall in the stock market. Even after a gain of 211 points Friday, the Dow Jones industrial average shed more than 7 percent of its value in the first three trading weeks of 2016.
China has unnerved investors with an economic slowdown that Beijing seems incapable of managing properly. The country’s decelerating growth has shrunk commodity prices and the emerging market countries that have supplied them to China.
Many see the Fed’s December rate hike as a key factor in the stock market’s tumble. The move amounted to only a small rise in the Fed’s still-extremely low target rate for overnight bank lending. But it signaled that a seven-year period of near-zero rates was ending and that while borrowing costs wouldn’t be rising fast, they would be headed steadily up.
The Fed’s critics had warned for years that by keeping rates so low for so long, it was fueling dangerous bubbles in assets such as stocks. Some now see the falling stock prices as the correction that they had forecast would occur after the Fed started raising rates.
Others say the market’s swoon seems hardly due to a small increase in the Fed’s benchmark rate. They point instead to China’s troubles, the slide in oil prices and weakness in some key areas of the global economy. Still, some economists suggest that if the Fed could have foreseen what has ensued in the month since it raised rates, it might have reconsidered.