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Afraid of their own courage

Andreas Rostek-Buetti Kommentarbild App PROVISORISCH
Andreas Rostek-Buetti
September 17, 2015

The Fed continues to hold off on turning around interest rates. The decision is the right one because it is based on economic reality and it helps many emerging economies, DW's Andreas Rostek writes.

USA Zinsentscheidung der US-Notenbank Fed - Janet Yellen
Image: Reuters/J. Ernst

In German, the phrase "afraid of their own courage" is used for people who hold back when they could probably do more. But sometimes such fear leads to the right decisions. Case in point: Washington and the Fed.

Fed chief Janet Yellen says she takes all factors into account when she prepares her next steps. Maybe she was looking at US consumer prices on Wednesday. Those show a downward trend. Hopes for an inflation upturn look different. The opposite of inflation, however, is deflation, making the monetary watchdogs shy away like a demon from holy water.

Even the much-touted employment rate in the United States - with just 5 percent officially unemployed - is more show than substance: Many of the new (and old) jobs are nothing but poorly paid part-time work.

That may have also shown the Fed chief that things aren't as good as they seem concerning the main objectives of the central bank - not in terms of price stability, not in terms of employment.

Choice between plague and cholera

Add to this the goal of stable markets. Here, however, the order of the day would have been more courage than fear. The enduring historically low US interest rates have, in fact, contributed to a true capital glut. This increases the desire for billions of big, risky deals that could endanger entire economies. An end to the low interest period would have been appropriate here.

Andreas Rostek-Buetti Kommentarbild App PROVISORISCH
Andreas Rostek is a staff writer for DW's Business Desk

It may be that Yellen and her Fed governors were rather following the warnings of economists from the World Bank and International Monetary Fund regarding emerging markets. Particularly they come to feel the consequences of US interest rate policy - with, of course, many individual residents of Brazil, India or even Turkey. US interest rates would attract investors, who would rather look again to rewarding shores. In the meantime, capital from emerging economies shrivels - affecting investors, companies and their employees. That was already the case: A turnaround in interest rates was only talked about - a turnaround in interest rates itself could even trigger some disasters.

Let alone China: There is strong suspicion that the Chinese stock market debacle is preceding a huge problem. China's debt has increased almost fourfold since 2007 and is now at more than $28 trillion (24.7 trillion euros). In 2014 China's state, provinces, companies and private households were already in debt to the tune of 280 percent of economic output. And that was before the crash. What would have happened if rising US interest rates attracted more capital to the US but China needed more capital to cope with its debt mountain?

That also means that the situation could be more serious than previously recognized. The shock waves of China's economy bottoming out would also set the United States back. Not a good time to tighten the reins on the economy.

An ounce of prevention is worth a pound of cure - the proverb is known to economists, as well as at kitchen tables around the world. Perhaps, the central bankers in Washington might also make use of such wisdom. In July Janet Yellen had declared to the world that it would soon be time for a normalization of key interest rates - they would rise this year. The whole world has waited and now must continue to wait. The announcement wasn't followed by any action.

Next chance is in December.