Fed’s solo act faces tremors in Turkey and a slower Europe

WA S H I N G T O N / S A N FRANCISCO: The US Federal Reserve, deep into a cycle of rate hikes it hopes to continue into 2020, now faces emerging risks from abroad that could short-circuit its plans.

The threats are modest but growing, from the fragile state of some emerging markets seen in the collapse of the Turkish lira to a slowdown in Europe that could make the European Central Bank (ECB) delay the expected start of its own rate increases.That would leave the Fed stranded as the only major central bank that is tightening policy, and in effect with three levers at once as it raises interest rates, cuts its asset holdings, and does so in a global environment likely to drive the dollar higher and make it harder on US exporters.

“The geopolitics have been turbulent. The Turkish situation has been significant: the fall in the lira, the devaluation, has been fast, and the speed of that change caught a lot of folks by surprise, us as well,” Atlanta Fed president Raphael Bostic said on Monday in Kingsport, Tenn, though so far it is not enough to change his view the Fed should raise rates once more this year, given the boost he sees coming from fiscal stimulus.

“Right now we are still analyzing and assessing, but it is definitely something we worry about,” Bostic said.

Central bankers from around the world gather in Wyoming this week for an annual research conference focused on technical topics of market structure. But when Fed chair Jerome Powell addresses the group Friday the attention will be on a broader question: how long can the Fed continue raising rates if it’s the only dancer at the ball?

SmallerplayersincludingCanada and Britain have raised rates based on local circumstances.

But absent comparable moves from the Fed’s immediate peers – particularly the ECB – the Fed’s rate increases may bite more than expected. — Reuters

Cars readied for export are parked next to a vehicle storage facility on the dockside at the ABP port in Southampton, Britain. The British government will set out a new export strategy on Tuesday aimed at boosting exports to 35 per cent of GDP, as it looks to increase trade ties with the rest of the world after leaving the EU. — Reuters photo