NEW YORK – Despite the stock market’s return to triple-digit gains on Tuesday in apparent response to signs that China will take steps to stimulate its economy, bankers worldwide are warning a decision by the Federal Reserve to increase interest rates next week could precipitate a stock-market collapse.
Deutsche Bank, the European Union's biggest bank, has grabbed attention by issuing a warning to the Federal Reserve that a rise in U.S. interest rates now would constitute nothing less than a “premeditated controlled demolition” that could cause global stock markets to collapse a dramatic 40 percent.
The Federal Reserve is scheduled to decide during the Federal Open Market Committee meeting scheduled for Sept. 16-17 whether to raise interest rates this year.
Various Federal Reserve board members have indicated that the drop in unemployment to 5.1 percent announced last week was “good enough” to suggest the U.S. economy is growing once again. The sign of growth triggers Fed fears of a 2 percent inflation rate unless interest rates are raised soon.
As noted by widely followed financial blog ZeroHedge.com, with Deutsche Bank warning of the impact of an interest rate rise, central banks worldwide would have no alternative but to resume to “helicopter money.”
“Helicopter money” is a reference to former Federal Reserve chairman Ben Bernanke, who was known on Wall Street as “Helicopter Ben” for his tendency to throw money to relieve economic downturns and ease stock market crashes. Bernanke’s policy of Quantitative Easing had the Federal Reserve print trillions of dollars to buy U.S. Treasury debt in an effort to hold interest rates at or near zero.
For the average American, the first noticeable impact of an increase of interest rates would be the cost of borrowing. For instance, Adjustable Rate Mortgages, or ARMS, would go up, increasing for many homeowners the amount of their monthly mortgage payments.
For the economy as a whole, increasing interest rates could well precipitate an even deeper stock market selloff than that experienced in August. It could signal an economic slowdown in which wages are depressed even as jobs become harder to find.
Deutsche Bank joins chorus of concern
On June 4, Reuters reported the International Monetary Fund in its annual assessment of the economy urged the Federal Reserve to delay a rate hike until the first half of 2016. The IMF anticipates signs of a pickup in wages and inflation at that time would be clearer indications of a sustained economic recovery.
The IMF forecast that the Fed's favored measure of inflation, the personal consumption expenditures (PCE) reading, would hit the central bank's 2 percent target only in mid-2017, according to Reuters.
On Tuesday, Kaushik Basu, the chief economist for the World Bank, warned the Federal Reserve that a decision to raise interest rates now could trigger “panic and turmoil” in emerging markets. He pointed to the weakness of global equity markets, as illustrated by the selloff in the Chinese stock market following China’s decision Aug. 11 to devalue the yuan by 3 percent.
“In fact, Basu may have just admitted, in not so many words, that Deutsche Bank's sinking feeling that the Fed's rate hike is nothing but a "controlled demolition" of the market, one which would send global equities 20-40% lower, is spot on,” said ZeroHedge.com regarding the World Bank pronouncement.
On Aug. 25, China’s Xinhua news agency reported from Shanghai that a researcher with China’s central bank denied China’s devaluation of the yuan was responsible for the global stock market rout in August. He claimed instead that the global downturn was caused by wide expectation of a Federal Reserve decision to raise rates in September.
Yao Yudong, head of the People's Bank of China's Research Institute of Finance, said the expected Fed rate hike had been the "trigger" for the wild market swings, according to the China news agency report.
WND has reported fears that a stock market collapse in the United States could trigger a massive international stock market downward adjustment when interest rates begin to rise.
In October 2014, the Fed under Yellen’s direction ended the policy of Quantitative Easing under which the Federal Reserve had purchased $85 billion in Treasury bonds every month in 2013, the peak of what turned out to be 37 consecutive months in a row.