At the US Federal Reserve, when is a threshold not a threshold? When it's an embarrassment

The Federal Open Market Committee is keen to hold fund rates in spite of falling unemployment. It's the first act of a newer, stricter committee.

Let’s take the Fed first. When is a threshold not a threshold? Answer: when it becomes an embarrassment.

With the unemployment rate plummeting towards the 6.5 per cent "threshold" touted by the Fed as the point at which it would consider rate increases, we were told in the statement released after their December meeting that the FOMC "now anticipates that the funds rate will be held unchanged until 'well past' the time that the unemployment rate has fallen below its 6.5 per cent threshold".

This was a meeting at which a majority in favour of just lowering the threshold to 6.0 per cent, or even 5.5 per cent, obviously couldn’t be found. Thank goodness. This is certainly a testament to the sagacity of the committee, as moving the goal posts so soon after they were inserted into the ground would have been seriously detrimental to the Fed’s credibility. What’s to say the threshold wouldn’t suddenly become 5 per cent, or even be abandoned completely when it was subsequently convenient?

We should bear in mind that in many ways this was the outgoing, dovish Fed’s final act, with Helicopter Ben at the helm (or the cyclic, I guess). The FOMC composition became distinctly more hawkish at the January meeting. No surprise then that the January meeting saw another $10bn reduction in QE and no lowering of thresholds.

My guess would be that by the March meeting several clouds that have been obscuring the health of the US economy, and hammering risk assets, will have blown over. I don’t feel that by any means all emerging markets will have escaped the cosh, but I do feel that we will have avoided widespread contagion, a la the 1997/8 Asian/Russian Crises, and that the pressure will be seen as contained and upon the most vulnerable - Argentina, Brazil, Turkey, South Africa, say, whereas key Asian nations will be relatively calm - India, China, Indonesia, Korea and Taiwan.

I do feel that headline US unemployment will be lower by then and that there will be a burgeoning realisation that we shouldn’t devalue that because of low participation rates. Widespread academic research has highlighted that a large proportion of the fall in participation rates has been caused by demographics - to somewhat over-simplify, baby boomer retirees - and is not going to race back up cyclically. Finally, US economic data will finally be free of both government shutdown and weather distortions, and looking very healthy.

Here in the UK, the BOE faces a very similar dilemma and Wednesday’s release of the Bank's Quarterly Inflation Report (QIR) will surely unveil tweeks to forward guidance. As in the US, unemployment is crashing, and last week’s January UK Services PMI Reading, although only a tad lower at 58.3, from 58.8 in Dec, boasted sub-components that still made excellent reading, with the key employment index moving higher, along with the outstanding business index which, at 55.3, stands at its high since 1997. At this rate Q1 growth is looking like 1.0 per cent qoq.

I do not expect the QIR to announce a reduction in the unemployment threshold to 6.5 per cent, say, but I do expect to see a nod to other metrics, such as wage and productivity growth. There must also be a 25 per cent chance that they take a leaf out of the Fed's book and introduce a version of the Summary of Economic Projections, with a record of individual MPC members' views on the future path of the Bank's Base Rate. In short, RIP forward guidance, long live old-style insight into the MPC's thinking and reaction function.

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System. Photograph: Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty Images
Show Hide image

I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.