Bears beware: the Fed has listened to the primordial scream of world markets

Bears beware: the Fed has listened to the primordial scream of world markets, by Ambrose Pritchard-Evans.

The US Federal Reserve has called off the hounds. China has abandoned efforts to purge financial excess, reverting to stimulus on multiple fronts.

Policy pirouettes by the world’s twin superpowers mark a critical moment in the tightening cycle, with sweeping implications for global asset markets and for the health of the international economy over the next year. …

Current Fed chairman Jay Powell went out of his way to soothe markets on Friday, pointedly invoking the 2016 episode. The message could hardly have been clearer. He vowed to shift gears “quickly” if need be. The Fed “wouldn’t hesitate” to suspend quantitative tightening (QT) if circumstances deteriorate. This was a far cry from his comment before Christmas that the Fed’s pre-set plan to shrink the balance sheet by $50 billion a month was on “autopilot” — even though half the world was by then in flames. …

No central bank has ever tried to exit QE on such a scale before. There is deep confusion over how QE works and how it interacts with the financial system. Monetarists accuse Fed officials of ignoring the “quantity theory of money” anchored even in the works of John Maynard Keynes, relying instead on incoherent “creditist” assumptions. …

In supporting chorus, the Chinese have cut the required reserve ratio for banks a fifth time. Local governments have been ordered to pull forward new bond issuance. Beijing’s Central Economic Work Conference before Christmas was a paean to stimulus. Deleveraging be damned. This comes too late to stop a “recession with Chinese characteristics” in early 2019. Berenberg Bank thinks the true growth rate has fallen to 3 percent. A Renmin University professor cited closed-door research suggesting that it may even be negative. His lecture went viral on the web before censors shut it down.