Advertisement
United States
OpinionComment
Andy Xie
Andy Xie

The View | Why an erratic Fed could pose biggest risk to global economy in 2024

  • Given the US bubble economy, a rising fiscal deficit and foolish behaviour of markets, the Federal Reserve faces a tough balancing act
  • It has already had to walk back some dovish statements, and further policy mistakes risk damaging the entire world

Reading Time:3 minutes
Why you can trust SCMP
1
US President Joe Biden speaks during a visit to a General Motors electric vehicle assembly plant in Detroit. The Biden administration has increased subsidies to US manufacturers as part of its economic competition with China, adding pressure to an already-growing fiscal deficit. Photo: AP
Andy Xie
The Federal Reserve’s ability to tame America’s monetary bubble remains the biggest factor in the global economic outlook. The US central bank made an unexpected dovish turn at the latest Federal Open Market Committee meeting but has already had to walk some of that back.
Advertisement

The Fed is on schedule to trim its balance sheet by another US$1.1 trillion next year. There will, without doubt, be financial incidents and an erratic Fed would only make things worse. This could be the biggest threat to the global economy in 2024.

The US bond market nearly met with disaster in October. Surging bond yields raised doubts over whether the US government could continue to borrow trillions to fund itself. It could be that Washington did something special on the side to calm the market. Certainly, the episode demonstrated the increasing difficulty for the United States to tame inflation, maintain growth and ensure government funding.

The US government borrowed US$2 trillion from the public in the 2023 financial year. The Congressional Budget Office predicts a fiscal deficit of at least 6 per cent of GDP every year over the next 10 years. The expectation of declining interest rates will help the government to borrow enough to keep things running, which was probably the primary motivation behind the Fed’s change of tune.

The US market welcomed news of the Fed’s dovish stand. If the current bubble expands for a few months, inflation is sure to become a more serious issue. Rising paper wealth will lead to more spending. This is a constraint on what the Fed could say. It had to turn around and pour cold water on the market. The Fed needs to ensure the bubble is not too hot or too cold to maintain a stable and growing economy.

US Federal Reserve chairman Jerome Powell speaks during a news conference at the headquarters of the Fed in Washington on December 13. The US central bank seems likely to have reached the end of its interest-rate-raising cycle. Photo: Getty Images
US Federal Reserve chairman Jerome Powell speaks during a news conference at the headquarters of the Fed in Washington on December 13. The US central bank seems likely to have reached the end of its interest-rate-raising cycle. Photo: Getty Images
The US is a bubble economy. The most revealing indicator of this is the rising ratio of paper wealth to GDP. The driving force of a macro bubble is always excessive money supply. The Fed’s balance sheet is a giveaway in that regard – it expanded it by about US$4 trillion, from about US$900 billion in 2008, to support the financial system during and after the 2008 financial crisis and added another US$4 trillion during the Covid-19 pandemic.
Advertisement
Advertisement