I was just about to start writing on the issue of the Federal Reserve becoming more like the People's Bank of China (PBOC) following yesterday's decision not to go ahead with a widely-anticipated interest rate hike, when a piece of research from Alberto Gallo, the RBS head of macro credit research, landed in my inbox.
Its headline? "People's Bank of America." I'm glad I'm not the only one to see how the Fed has illustrated once more the old saying that the extremes touch each other. The world's biggest communist economy and its biggest capitalist one have strikingly similar policies, if you look carefully. And both of these policies increasingly fail to deliver.
We know about the PBOC's efforts to control what's happening on the Chinese stock markets and the tight rein it keeps on capital flows in and out of China. Those efforts have not stopped investors from worrying and from continuing to deflate the Chinese stocks bubble, while helping to bring the PBOC down from the pedestal of competence on which it had been placed by some market observers, both in China and abroad.
The Fed may be fast following in the PBOC's footsteps, as its credibility is rapidly deteriorating. Gallo ran a survey among institutional investors, last week, on what the Fed should do and what it would end up doing, and the results are very interesting in the light of the decision.
Of the 135 institutional investors in the survey, 80% said they believed the first Federal Reserve interest rate hike should take place this year, and 57% said it should take place in September. However, only 42% believed the Fed would have the guts to actually hike rates. Perhaps more significantly, 63% believe central banks are losing credibility and ammunition.
The Fed's main advantage over other central banks -- and especially over the PBOC -- was its credibility. Until not long ago, it had managed to steer expectations in the markets successfully, while making it look like it was only preoccupied with the U.S. economy.
With yesterday's decision to stand pat instead of raise the interest rate, it has lost that advantage. Fed Chair Janet Yellen has repeated ad nauseam that the Fed was data-dependent, and even said that "some" improvement in labor markets would be enough to persuade the central bank to raise interest rates. To make such a U-turn in a month, when the data does not justify it, shows that the Fed is making it up as it goes along.
Just like in China, where the PBOC was unable to stop the decline in the stock markets despite throwing liquidity at the market via commercial banks, cutting interest rates, lowering reserve requirement ratios and pulling other rabbits out of its hat, the Fed has lost its influence over the markets.
Stocks in Europe were down by around 2.5% in early afternoon trading on Friday, while investors struggled to get to grips with this simple truth: the Fed doesn't have all the answers, even if for a long time it pretended it did.
Of course, not everybody believes the Fed's decision was a big mistake. Chuck Self, CIO of iSectors, an ETF strategist and outsourced investment manager, had expected the central bank to hold, and believes that it will probably still hike in December. His strategy, for investors who have lots of cash and are on the sidelines, is to "layer money into the market over the next few months."
This is because, until third-quarter earnings are reported -- Self believes they will be better than expected -- volatility will remain high and the markets will trade in a range. But "when the good earnings numbers get reported and the consensus around a December rate hike is firm, the stock market will resume its rise," he predicts.
That may be so, and investors in stocks may enjoy better-than-expected earnings, especially since the Fed's move also means the dollar will be weak, and this will help U.S. companies' profits, as Jim Cramer writes.
However, with yesterday's delay of an interest rate hike, the Fed has shown it is no better than the PBOC: It claims to be ahead of the market, but in fact it is, sadly, lagging. When the next crisis hits, expect no miracle.