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The Fed was about to normalize this year by increasing the cost of borrowing money to a level higher than inflation and by removing the stimulus program that allows him to buy and hold billions of dollars in US bonds in his balance sheet.
- But President Jay Powell and the Fed's decision-makers completely reversed the trend by announcing that they had not only increased their rates, but that they would continue the program of buying bonds ( at a lower level) in the near future.
Why it's bad: According to analysts, the Fed's turnaround shows that the world's leading economists see the danger.
- Global growth is slowing in much of Europe and Japan; and Canada, Australia and New Zealand could be in recession this year.
- Global debt markets are also littered with risky loans. Consumer debt is now increasingly being held out of banks, including a large portion of mortgage debt, credit card debt and student loans, which was much bigger than the housing bubble before the financial crisis .
- Central Banks and international aid institutions like the IMF issue warnings and write growth forecasts around the world.
- The yield curve of the US Treasury reversed in March, a historically accurate recession indicator, and the Japanese dollar and Japanese yen strengthened, a sign of fear and uncertainty in the market.
Why is it good: Rethinking the Fed seems to do exactly what it was designed for.
- US stocks are booming, reaching unprecedented highs, joining a global equity rally.
- Expectations of US GDP for the first quarter went from almost zero to over 2.5% in about a month and a half.
- China Economic Data has improved and investors are starting to see signs that global trade is at a standstill and that it is about to rebound.
The change in monetary policy has divided the opinions of analysts:
- "I am stressed," Lee Ferridge, head of multi-asset strategy at State Street, told Axios. "I am still concerned that we have reacted to the Fed's decision without asking why it has rocked?"
- "The global economic recovery will persist for a few more years" Jim Paulsen, chief strategist of the Leuthold Group, says in an email. "We are enjoying full political support from almost every corner of the world without the least major economy in recession."
Be smart: Many fund managers are really optimistic about the US economy and equities, but buying trends have not shown it. Rather than adding high-risk stocks or plunging into emerging markets, as was generally the case in times of heightened confidence, asset managers sell equities or remain neutral, the data show.
- Verification of reality: The dirty little secret of this year's stock market rally is that it has been fueled by stock buybacks rather than by real money investors. But that's starting to change now.
The bottom line: There is no perfect answer here. US economic data has been mixed since the Fed's downturn, and more and more investors have concluded that they have done the right thing. But at some point, the global economy will have to fend for itself, without artificially low interest rates and billions of billions of central bank stimulus packages. The big question is how far are we from this point.
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