Any US Fed move to raise rates will only set back America's weak recovery
Guru Ramakrishnan says desultory inflation and high debt in the US make raising interest rates - as the Fed seems prepared to do - a rash move that would torpedo whatever recovery there is
The voting members of the US Federal Reserve and their coterie of 350 PhDs are most likely going to make a significant policy mistake next quarter. An academic-minded Fed, aided and abetted by the Taylor rule, now seems to think that US rates should be well north of the zero bound they currently inhabit.
The strong US employment report last week will further strengthen their resolve. They seem eager to raise rates, to be able to say they have begun their exit from the infamous "liquidity trap".
One can see why they think this way. Seventeen central banks so far this year have been drawn into the vortex of what seems to be a black hole - moving rates down towards zero, and a few of them below - as they try to combat the global deflationary forces at work. Having been at zero rates for six years and having shored up growth, the Fed wants to be the first out.
The Fed should be paying close attention to the signals emanating from the US bond market.
In the US, fourth-quarter real gross domestic product growth slowed to 2.6 per cent. More alarmingly, the GDP price index printed zero two weeks ago. This puts the US in a position where real and nominal GDP growth rates have converged. This combination is a dangerous trap the Fed should be wary of. In a debt-laden society, the nominal growth rate - helped by positive inflation - is critically needed to reduce the burden of debt. So it should come as no surprise that long-term rates in the US have, during the past few weeks, moved sharply down to reflect this and the huge debt burden.
Over the past 12 months, the US bond markets have been signalling to the Fed that this recovery does not feel as real as it looks. It has been an asset price recovery that has benefited a fraction of the top 1 per cent of the US population, with little to no real wage or income growth for the rest.