Either we validate the financial asset prices and growth faster, or we slip into a global recession with financial disorder. If only central banks would step back and allow economies to determine their own futures. The irony is that the economy has healed, but it is not unfettered. The Fed may be able to get one more rate rise to hold, but no more. We must expect high volatility especially in the currency markets. Business conditions are much more positive than stock markets suggest.
The Fed is now in a very uncomfortable position, which could easily become much more difficult still. This is the risk in hiking rates before economic conditions demanded it. When both interest rates and inflation are very low, there is unlimited room to increase rates in response to an unexpected surge in inflation to a rate will above the target. And under those circumstances it is very hard to react in time and with adequate force to any unexpected weak economic performance.
Europe is looking into the jaws of a recession. Stronger downside risks, including China’s change of growth model, lower commodity prices, and “asynchronous” monetary policy around the world prompted the International Monetary Fund (IMF) to lower its global growth outlook, The IMF pared its global growth forecast to 3.4% in 2016, a decline of 0.2% from the agency’s prior estimate in October. The world faces weaker growth. Fewer jobs are being created around the world and there will be countries that will struggle, particularly those suffering from the double downside risk, which is the trade relationship with China slowing down and lower commodity prices. This will affect some of the emerging market economies and low income countries that are vastly commodity export dependent.
The chaos created by the mass migration from turmoil in Syria to Europe has European economies examining closely their ability to absorb these masses. Many are acting to curb the intake.