Heinz:
I welcome today's rise. I plan to sell all longs except gold and reestablish bear fund positions.
The CRB is booming even with super strong dollar. Imagine what will happen when the buck tanks.
Interesting commentary from Steve Roach today. Note that he states in no certain terms that the greenback must come down.
Global: The Fed takes on the World
Stephen Roach (New York)
Back in my Washington days, when asked what I did for a living, I used to quip that I worked for a local central bank. The
Fed, in reality, is just that -- a national authority, setting policy for a national economy. Other than in times of crisis -- late
1998 comes to mind -- international considerations are important, but rarely decisive, in guiding the FOMC. But the
reverse logic does not always apply. Fed actions can have important implications for the broader global economy. Is this
one of those times?
If we and the financial markets have got it right, the Federal Reserve is at a key juncture in the current monetary tightening
cycle. Incrementalism is about to give way to a more aggressive approach, as the central bank ups the tightening dosage
from 25 bp to a likely 50 bp move on May 16. Moreover, there is good reason to believe that the Fed will leave open the
door for further policy adjustments in the months ahead -- depending, of course, on the usual caveats of incoming data and
financial market conditions.
On this latter point, I note with interest a recent statement by Fed Vice Chairman Roger Ferguson, who stressed that during
periods of structural change -- and presumably that?s what the New economy is all about -- policymakers should "rely less
on the future predicted by the increasingly unreliable old models and more on inferences from the more recent past." In
this context, 6.1% average GDP growth over the three quarters ending 1Q00, an unemployment rate that has now pierced
the once sacrosanct 4% threshold, and cyclical upturns in the wage cycle and core inflation, say it all -- the Fed wants a
slowdown. If history is a guide, once the central bank comes to that conclusion, it seems reasonable to surmise that it will
do whatever it takes to achieve such an outcome.
Our task as macro prognosticators is to assess the ramifications of recent and prospective Fed moves on the US and the
global economy. As always, the central bank will be seeking that ever-elusive soft landing. But there is an important point
of confusion in this regard. Once the economy has gone into a zone of overheating -- and that?s what the data are now
suggesting -- then it doesn?t make sense for the authorities simply to slow the economy down to its longer-term
inflation-stable growth rate. Such a strategy would maintain the current state of cyclical pressures, doing little to alleviate
the Fed?s source of concern.
Instead, the central bank must create enough slack in the economy to temper those pressures. That means it must slow the
economy to a pace below its longer-term growth potential. Your guess is as good as mine as to what the inflation-stable
growth rate actually is. A few years ago, we all thought it was around 2.25%; now there is a general consensus that it has
shifted upward into the 3% to 3.5% zone. If that?s right, the soft landing would only occur if the Fed were successful in
bringing the growth rate of the US economy down into 2% to 2.5% zone. Such an outcome would represent a significant
shortfall from average gains of 4.5% that we estimate occurred in the four years ending in 2000.
If the Fed gets its way, the world economy would then have to come to grips with a very different US growth bogey. It?s
not difficult to scope out the potential global impacts of such a downshift: The US accounts for 22% of world GDP. That
means a two-percentage point shortfall would knock 0.4 percentage point off world GDP growth. The ripple effects on
other countries through cross-border trade flows could be worth another 0.2 to 0.4 percentage point of global growth --
bringing the total impact to around 0.75 percentage point. Such a haircut would be sufficient to take our 4.2% baseline
case for world GDP growth in 2001 down to around 3.5% -- leaving the world economy cruising at close to its long-term
trendline growth rate.
All this, of course, presumes that the Fed is able to pull it off without a hitch. The record of history is hardly encouraging
in this regard. Central banks typically overshoot in easing and tightening cycles, alike. This year?s growth outcome in the
US, which we estimate will exceed 5%, is but the latest example of such a proclivity. Such overshoots are hardly
surprising. Monetary policy is not a science -- it remains very much in the hands of smart, disciplined, but very human,
policymakers. And like the rest of us mere mortals, they, too, don?t always get it perfectly right. That?s likely to be all the
more the case if, in fact, the Fed follows the Ferguson credo and places greater weight on recent data in formulating its
policy choices. The lags between past policy actions and incoming data will, almost by definition, prolong the monetary
tightening cycle past its point of welcome.
Here?s where the story gets particularly dicey. With financial markets still priced for near-perfection, expectations of a
sharp slowing of US GDP growth in 2001 could well trigger a sharp and sustained correction in the stock market. Under
such circumstances, the impacts on the real economy could be magnified via the wealth effect -- also setting in motion a
long overdue depreciation of the dollar, which would put further pressure on equities and the economy. And so, the
virtuous circle, which has been underpinning the US and global economy, could quickly turn into a vicious circle. With
financial market feedback all the more critical for a wealth-dependent US economy, further downside risks to the global
economy cannot be minimized as the Fed now ups the ante on the tightening cycle. As always, the Fed is seeking the
benign outcome of a soft landing. But as it now alters the pace of monetary tightening, the risks will increasingly tilt in the
direction of a much harder outcome. There can be no mistaking the global scope of America?s local central bank. |
