The Ability To Pilot Economies By Central Banks Is In Doubt

Central banks are meeting more often now. But many experts now question the ability of central banks to pilot their economies. FED is being blamed by many experts for giving birth to past financial crisis. For example Alan Greenspan let the real estate bubble grow. He didn’t do anything to burst it. Bursting the real estate bubble required increasing interest rates which he was loath to do. So what happened? When the real estate bubble burst, it caused a massive ripple effect. The end result, the stock market crash of 2008.

FED started the bubble in the first place that caused the stock market to crash. After the stock market crash when financial crisis spread global, FED sought to fight the financial crisis by lowering the interest rates to almost zero and printing more and more greenbacks. This became known as Quantitative Easing (QE). Soon Bank of Japan started its own QE program followed by the European Central Bank (ECB).

The Fed shut its quantitative easing (QE) program just over six months ago. But it seems likely it will be forced to wait until later this year, instead of June as was expected a short time ago, before raising rates from record lows.

A disappointing start to the year from another punishing winter and trade disruption at West Coast ports, together with a rally in the dollar that is now restraining inflation and U.S. exports, is chiming a familiar refrain: low rates for longer.

Few expect the Fed to use its two-day meeting as a launching pad for what will eventually be the first interest rate hike in nearly a decade. Wages and inflation still are not rising significantly and even hiring has had a setback.

Many, however, expect the central bank to make it clear in its policy statement on Wednesday that it is inclined to take the first solid opportunity it can find to set extraordinarily accommodative interest rate policy back on a more normal path.

So the question that is perplexing for Yellen is when to act and when not to act. If you act too soon, it can choke the economic recovery. But if you wait and don’t act, things go out of control. Experts are now saying that FED may not take the risk of increasing the interest rate this year. Whatever markers are rules by the expectations. If the market participants start expecting FED to do something. This will get reflected in the price. When FED doesn’t do that think there will be a wild reaction by the market which is often called correction.

About The Author


I have done masters from Harvard University. I am interested in day trading currencies, options and stocks.