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How debt, the dollar, and China could tie the Fed’s hands

from Market Watch:


The Federal Reserve’s recent rate hike is symbolic, intended to signal the end of the financial crisis and the start of normalization.

The rise will have minimal effect on consumption and investment. Analysts have already moved beyond the Fed’s well-telegraphed decision, focusing on the future trajectory of U.S. monetary policy.

The Fed forecasts around four additional rate increases in 2016 and a similar number in 2017. This would mean that U.S. official rates would be around 1.375% and 2.375% by the end of 2016 and 2017, respectively. The median estimate for the longer-term federal funds rate is around 3.5%.


Yet the central bank’s moves may be more gradual than most Fed-watchers expect. Here’s why:

1. Economic activity is patchy: The Fed accentuates the positive — solid employment growth, strong auto sales, and improvements in housing. But it ignores weaknesses in manufacturing, high inventory levels, and uncertain consumption.

Job creation in the U.S. remains uneven. The decline in the unemployment rate is exaggerated by lower participation rates. Employment as percentage of population is around 59%, the same as in the 1980s and below its peak of 63%. Wage growth is minimal.

The economic recovery was underpinned, in part, by the domestic energy boom. The retrenchment of investment and employment, driven by low oil prices and financial problems, will continue to be felt for some time to come.

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