Stock investors in the U.S. are reeling from a week which saw the Nasdaq and NYSE markets get hammered. Global investors have had a literal panic attack in the past few weeks over the prospects for growth in China. Investors who have been in the game for awhile always get nervous when central banks and governments begin to intercede in the markets. This interference removes many of the free market forces that are expected to help matters correct themselves. Government intervention also sends a signal to investors that things might just be much worse that previously imagined.
Now most investors are waiting to see what the Fed is going to do with interest rates. For years, the rate has been kept very low. This has kept things running in many industries, albeit at a slower than usual rate. The Fed has been very reluctant to raise the rate at all for fear it would have a chilling effect on growth. Investors have to place some sort of bet based on the rate move. When it’s announced in the middle of September, it could have a major impact. There’s always a chance that the Fed will do nothing. This has happened many times before. Even that inaction will require careful analysis from the many economists who are studying the topic.
Christian Broda, the famed economist, has been questioning the Fed’s lack of willingness to raise the rates this whole year. In an op-ed piece in the Wall Street Journal with Stanley Druckenmiller, Broda openly questioned why the Fed was maintaining a zero interest rate environment in a non-emergency environment. Broda, who is a managing director at Duquesne Capital Management, argued that the flood of excess capital was excessive, even for a recovering economy. Druckenmiller and Broda pointed out that the global debt levels have risen to $57 trillion. Broda has been predicting that the dollar would continue to gain strength, but some of his prediction is predicated on the Fed finally moving rates upward.
If Broda is right about the dollar and the Fed, the actions of the central banks become more perplexing. If they’ve been unable to kickstart the economy for almost a decade, why would they need to persist at this stage of the game? Economists around the U.S. now must decide if growth is going to slow much worse than they initially thought. If it is, they will not want to be exposed to major investments in the U.S. equities market. Obviously, many investors have been worried about this during the current week. Their vicious selloff indicates that they’ve lost faith in near-term growth. The Fed may raise rates and spook them more. More will be known by the middle of next month.