Conceivably, the Federal Reserve(Fed) made public at 4am this Thursday that following the unswerving policy, the rate was maintained at a level close to zero. Regarding the yield curve control anticipated by the market, the Fed did not take action to initiate any measures. Yet, the Fed’s dot plot hinted that the close-to-zero-rate environment would subsist till the end of 2020, which suggested it would be hardly possible for the US to get back on its feet with a V-shaped recovery. No wonder when the market learnt that the Fed stayed rather conservative of the economy in one or two years ahead, there was active profit-taking in the US stock market on Wednesday. It insinuated that investors jittered at the fact that the phenomenal rebound of the US stocks over the past two months had been the result of overestimation of the recovery speed of the US economy. Consequently, Fed’s report has become a beacon to major players for most desirable profit-taking moments.

The author has always held the view that most seniors of the Fed, including chairmen, are armchair experts with barely any practical experience so it is hard for them to manage the complicated current financial environment. Take Fed’s latest dot plot as an example. Almost all officials of the Federal Open Market Committee(FOMC) sided with holding the official rate stiff with regard to the anticipation of the interest rate level in two and a half years ahead. Superficially speaking, preserving an extraordinarily low rate is conducive to animating the US economy. However, amidst the grave recession, when the FOMC projected that the close-to-zero-rate environment would subsist, investors would be concerned whether the US economy would revive in the short run. As one might have expected, the plunge of DJIA after Fed’s keynote address about the rate only reflected investors had targeted early on when they should make profit.

The dot plot introduced by Bernanake is merely a pedantic view, though well-intentioned, the projection of which happens to get the market worried about the future US economy. Is this consequence resulting from such foresighted indicators what the Fed have been hankering after? Obviously, it is too obvious to mention!

Asset market disengages from real economy

Bernanake launched quantitative easing(QE) three times to spur the economy in his eight-year tenure. Though the US finally broke away from the menace of economic slumps, there are quite some sequelae, including the absence of a stable and sustainable withdrawal mechanism that should have been initiated by the Fed. What happened in the financial market over the past few years have demonstrated unequivocally to us that it is easy for quantitative easing to seep into the market, but not vice versa. Seemingly, the so called “interest rate normalization” has been falling away as time goes by.

Now, the QE Infinity adopted by incumbent Chairman Jerome Powell even evinces that the Fed has already stepped into the road of no return. In view of the jaw-dropping increase of USD3,000 billion on Fed’s balance sheet, it seems hardly viable for the US official rate to pick up, especially when too much money chasing limited assets. The hysterical manifestations in the asset market have already disengaged from the feeble steps of the real economy. If the condition persists, wealth inequality in different countries will worsen. In the end, the worldwide stability of politics and economy is bound to be the ultimate sacrifice.

(Kwan Cheuk Chiu, economist, and Director of ACE Centre for Business and Economic Research)

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