ML-Implode News - AEP: Fed will have to reverse gears fast if anything goes wrong

``Danny Blanchflower, a Dartmouth professor and a former UK rate-setter, said the US labour market is not as tight as it looks. Inflation is nowhere near its 2pc target and the world economy is still gasping for air. He sees a 50/50 chance that the Fed will have to pirouette and go back to the drawing board.
"All it will take is one shock," said Lars Christensen, from Markets and Money Advisory. "It is really weird that they are raising rates at all. Capacity utilization in industry has been falling for five months."

Mr Christensen said the rate rise in itself is relatively harmless. The real tightening kicked off two years ago when the Fed began to slow its $85bn of bond purchases each month. This squeezed liquidity through the classic quantity of money effect.
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It was the delayed effect of this crunch that has caused the "broad" dollar index to rocket by 19pc since July 2014, the steepest dollar rise in modern times. It is a key cause of the bloodbath for commodities and emerging markets.
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Yet the Fed is taking a big gamble by tightening at a time when the ECB and the People's Bank of China and a clutch of other central banks are still loosening -- and arguably doing so in order to drive down their currencies.
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The risk is that the dollar will keep rising to the point where the US economy stalls, leaving America as the "latest victim of the deflationary pass the parcel which has plagued the global economy for a decade".

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AEP: Fed will have to reverse gears fast if anything goes wrong