Global Economy Concerns US Fed

 "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."

Despite an outwardly (perhaps overly) optimistic belief that there are better economic conditions to come: 

"with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate."

As we discussed in this blog on Wednesday, global (and US) inflation is low and looks to be heading lower.

As we discussed in this blog on Monday, there is a great deal more global debt outstanding than there was in 2007 and the impact of higher interest rates will therefore have a greater "destabilizing" impact.

Much of the growth of this debt comes from China and emerging economies and the stalling of economic growth there is becoming problematic.

It is problematic because the levels of debt are not being justified by current growth rates. 

Lenders want more protection and therefore credit conditions  are naturally tightening. 

The stronger $US (weaker foreign currencies) is also a drag on the US and global economy.

Fortunately, the Fed has recognized this and have decided to take a cautious approach.

What happens next?

• Equity markets will have to focus on fundamentals: declining earnings make equity prices at current levels relatively expensive.
• High grade government bond markets will become a haven for safety and bond yields will remain low.

We are in a low return environment part of the cycle: slow economic growth, low (below target) inflation, low interest rates and slow earnings growth means below average returns.

As with any cycle, we must remain patient for it to run its course.