Tag Archives: monetary policy

The Fed’s Stunning Admission Of What Happens Next

Following an epic stock rout to start the year, one which has wiped out trillions in market capitalization, it has rapidly become a consensus view (even by staunch Fed supporters such as the Nikkei Times) that the Fed committed a gross policy mistake by hiking rates on December 16, so much so that this week none other than former Fed president Kocherlakota openly mocked the Fed’s credibility when he pointed out the near record plunge in forward break evens suggesting the market has called the Fed’s bluff on rising inflation.

All of this happened before JPM cut its Q4 GDP estimate from 1.0% to 0.1% in the quarter in which Yellen hiked.

To be sure, the dramatic reaction and outcome following the Fed’s “error” rate hike was predicted on this website on many occasions, most recently two weeks prior to the rate hike in “This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession” when we demonstrated what would happen once the Fed unleashed the “Ghost of 1937.”

As we pointed out in early December, conveniently we have a great historical primer of what happened the last time the Fed hiked at a time when it misread the US economy, which was also at or below stall speed, and the Fed incorrectly assumed it was growing.

We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.

Here is what happened then, as we described previously in June.

[No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.

Just like now.

Follows a detailed narrative of precisely what happened from a recent Bridgewater note:

The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.

The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).

The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.

Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!

Or, as Bank of America summarizes it: “The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones.”

* * *

As it turns out, however, the Fed did not even have to read this blog, or Bank of America, or even Bridgewater, to know the result of its rate hike. All it had to do was to read… the Fed.

But first, as J Pierpont Morgan reminds us, it was Charles Kindleberger’s “The World in Depression” which summarized succinctly just how 2015/2016 is a carbon copy of the 1936/1937 period. In explaining how and why both the markets and the economy imploded so spectacularly after the Fed’s decision to tighten in 1936, Kindleberger says:

“For a considerable time there was no understanding of what had happened. Then it became clear. The spurt in activity from October 1936 had been dominated by inventory accumulation. This was especially the case in automobiles, where, because of fears of strikes, supplies of new cars had been built up. It was the same in steel and textiles – two other industries with strong CIO unions.”

If all off this sounds oddly familiar, here’s the reason why: as we showed just last week, while inventories remain at record levels, wholesale sales are crashing, and the result is that the nominal spread between inventories and sales is all time high.

The inventory liquidation cycle was previewed all the way back in June in “The Coming US Recession Charted” long before it became “conventional wisdom.”

Kindleberger continues:

When it became evident after the spring of of 1937 that commodity prices were not going to continue upward, the basis for the inventory accumulation was undermined, and first in textiles, then in steel, the reverse process took place.

Oil anyone?

And then this: “The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on an illusion.

Which, of course, is what we have been saying since day 1, and which even such finance legends as Bill Gross now openly admit when they say that the zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable, adding that “the wealth effect is created by leverage based on QE’s and 0% rates.

And not just Bill Gross. The Fed itself.

Yes, it was the Fed itself who, in its Federal Reserve Bulletin from June 1938 as transcribed in the 8th Annual General Meeting of the Bank of International Settlements, uttered the following prophetic words:

The events of 1929 taught us that the absence of any rise in prices did not prove that no crisis was pending. 1937 has taught us that an abundant supply of gold and a cheap money policy do not prevent prices from falling.

If only the Fed had listened to, well, the Fed.

What happened next? The chart below shows the stock market reaction in 1937 to the Fed’s attempt to tighten smack in the middle pf the Great Depression.

If the Fed was right, the far more prophetic 1937 Fed that is not the current wealth effect-pandering iteration, then the market is about to see half its value wiped out.

Fear porn or another opportunity to BTFD? Source: ZeroHedge

 

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Home Ownership Rate Since 2005

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by Wolf Richter

The quintessential ingredient in the stew that makes up a thriving housing market has been evaporating in America. And a recent phenomenon has taken over: private equity firms, REITs, and other Wall-Street funded institutional investors have plowed the nearly free money the Fed has graciously made available to them since 2008 into tens of thousands of vacant single-family homes to rent them out. And an apartment building boom has offered alternatives too.

Since the Fed has done its handiwork, institutional investors have driven up home prices and pushed them out of reach for many first-time buyers, and these potential first-time buyers are now renting homes from investors instead. Given the high home prices, in many cases it may be a better deal. And apartments are often centrally located, rather than in some distant suburb, cutting transportation time and expenses, and allowing people to live where the urban excitement is. Millennials have figured it out too, as America is gradually converting to a country of renters.

So in its inexorable manner, home ownership has continued to slide in the third quarter, according to the Commerce Department. Seasonally adjusted, the rate dropped to 64.3% from 64.7 in the prior quarter. It was the lowest rate since Q4 1994 (not seasonally adjusted, the rate dropped to 64.4%, the lowest since Q1 1995).

This is what that relentless slide looks like:

US-quarterly-homeownership-rates-1995-2014

Home ownership since 2008 dropped across all age groups. But the largest drops occurred in the youngest age groups. In the under-35 age group, where first-time buyers are typically concentrated, home ownership has plunged from 41.3% in 2008 to 36.0%; and in the 35-44 age group, from 66.7% to 59.1%, with a drop of over a full percentage point just in the last quarter – by far the steepest.

Home ownership, however, didn’t peak at the end of the last housing bubble just before the financial crisis, but in 2004 when it reached 69.2%. Already during the housing bubble, speculative buying drove prices beyond the reach of many potential buyers who were still clinging by their fingernails to the status of the American middle class … unless lenders pushed them into liar loans, a convenient solution many lenders perfected to an art.

It was during these early stages of the housing bubble that the concept of “home” transitioned from a place where people lived and thrived or fought with each other and dealt with onerous expenses and responsibilities to a highly leveraged asset for speculators inebriated with optimism, an asset to be flipped willy-nilly and laddered ad infinitum with endless amounts of cheaply borrowed money. And for some, including the Fed it seems, that has become the next American dream.

Despite low and skidding home ownership rates, home prices have been skyrocketing in recent years, and new home prices have reached ever more unaffordable all-time highs.

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Assisted-Living Complexes for Young People

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by Dionne Searcey

One of the most surprising developments in the aftermath of the housing crisis is the sharp rise in apartment building construction. Evidently post-recession Americans would rather rent apartments than buy new houses.

When I noticed this trend, I wanted to see what was behind the numbers.

Is it possible Americans are giving up on the idea of home ownership, the very staple of the American dream? Now that would be a good story.

What I found was less extreme but still interesting: The American dream appears merely to be on hold.

Economists told me that many potential home buyers can’t get a down payment together because the recession forced them to chip away at their savings. Others have credit stains from foreclosures that will keep them out of the mortgage market for several years.

More surprisingly, it turns out that the millennial generation is a driving force behind the rental boom. Young adults who would have been prime candidates for first-time home ownership are busy delaying everything that has to do with becoming a grown-up. Many even still live at home, but some data shows they are slowly beginning to branch out and find their own lodgings — in rental apartments.

A quick Internet search for new apartment complexes suggests that developers across the country are seizing on this trend and doing all they can to appeal to millennials. To get a better idea of what was happening, I arranged a tour of a new apartment complex in suburban Washington that is meant to cater to the generation.

What I found made me wish I was 25 again. Scented lobbies crammed with funky antiques that led to roof decks with outdoor theaters and fire pits. The complex I visited offered Zumba classes, wine tastings, virtual golf and celebrity chefs who stop by to offer cooking lessons.

“It’s like an assisted-living facility for young people,” the photographer accompanying me said.

Economists believe that the young people currently filling up high-amenity rental apartments will eventually buy homes, and every young person I spoke with confirmed that this, in fact, was the plan. So what happens to the modern complexes when the 20-somethings start to buy homes? It’s tempting to envision ghost towns of metal and pipe wood structures with tumbleweeds blowing through the lobbies. But I’m sure developers will rehabilitate them for a new demographic looking for a renter’s lifestyle.

Hillary: “Business Does Not Create Jobs”, Washington Does

Hillary_Clinton_2016_president_bid_confirmed by Tyler Durden

We have a very serious problem with Hillary. I was asked years ago to review Hillary’s Commodity Trading to explain what went on. Effectively, they did trades and simply put winners in her account and the losers in her lawyer’s. This way she gets money that is laundered through the markets – something that would get her 25 years today. People forget, but Hillary was really President – not Bill. Just 4 days after taking office, Hillary was given the authority to start a task force for healthcare reform. The problem was, her vision was unbelievable. The costs upon business were oppressive so much so that not even the Democrats could support her. When asked how was a small business mom and pop going to pay for healthcare she said “if they could not afford it they should not be in business.” From that moment on, my respect for her collapsed. She revealed herself as a real Marxist. Now, that she can taste the power of Washington, and I dare say she will not be a yes person as Obama and Bush seem to be, therein lies the real danger. Giving her the power of dictator, which is the power of executive orders, I think I have to leave the USA just to be safe. Hillary has stated when she ran the White House before regarding her idea of healthcare, “We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it.” When has that ever happened?

Hillary believes in government at the expense of the people. I do not say this lightly, because here she goes again. She just appeared at a Boston rally for Democrat gubernatorial candidate Martha Coakley on Friday. She was off the hook and amazingly told the crowd gathered at the Park Plaza Hotel not to listen to anybody who says that “businesses create jobs.” “Don’t let anybody tell you it’s corporations and businesses that create jobs,” Clinton said. “You know that old theory, ‘trickle-down economics,’” she continued. “That has been tried, that has failed. It has failed rather spectacularly.” “You know, one of the things my husband says when people say ‘Well, what did you bring to Washington,’ he said, ‘Well, I brought arithmetic,” Hillary said.

I wrote an Op-Ed for the Wall Street Journal on Clinton’s Balanced Budget. It was smoke and mirrors. Long-term interest rates were sharply higher than short-term. Clinton shifted the national debt to save interest expenditures. He also inherited a up-cycle in the economy that always produces more taxes. Yet she sees no problem with the math of perpetually borrowing. Perhaps she would get to the point of being unable to sell debt and just confiscate all wealth since government knows better. 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Here’s a shocker or is it? Take the quiz and then check your answers at the bottom. Then take action!!!

And, no, the answers to these questions aren’t all “Barack Obama”!

1) “We’re going to take things away from you on behalf
of the common good.”
A. Karl Marx
B. Adolph Hitler
C. Joseph Stalin

D. Barack Obama
E. None of the above

2) “It’s time for a new beginning, for an end to government
of the few, by the few, and for the few…… And to replace it
with shared responsibility, for shared prosperity.”
A. Lenin
B. Mussolini
C. Idi Amin
D. Barack Obama

E. None of the above

3) “(We)…..can’t just let business as usual go on, and that
means something has to be taken away from some people.”
A. Nikita Khrushchev
B. Joseph Goebbels
C. Boris Yeltsin

D. Barack Obama
E. None of the above

4) “We have to build a political consensus and that requires
people to give up a little bit of their own … in order to create
this common ground.”
A. Mao Tse Tung
B. Hugo Chavez
C. Kim Jong II

D. Barack Obama
E. None of the above

5) “I certainly think the free-market has failed.”
A. Karl Marx
B. Lenin
C. Molotov
D. Barack Obama

E. None of the above

6) “I think it’s time to send a clear message to what
has become the most profitable sector in (the) entire
economy that they are being watched.”
A. Pinochet
B. Milosevic
C. Saddam Hussein

D. Barack Obama
E. None of the above

and the answers are ~~~~~~~~~~~~~

(1) E. None of the above. Statement was made by Hillary Clinton 6/29/2004
(2) E. None of the above. Statement was made by Hillary Clinton 5/29/2007
(3) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(4) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(5) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(6) E. None of the above. Statement was made by Hillary Clinton 9/2/2005

Want to know something scary? She may be the next POTUS.

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FHA Is Set To Return To Anti-House-Flipping Restrictions


House flippers buy run-down properties, fix them up and resell them quickly at a higher price. Above, a home under renovation in Amsterdam, N.Y. (Mike Groll / Associated Press)

Can you still do a short-term house flip using federally insured, low-down payment mortgage money? That’s an important question for buyers, sellers, investors and realty agents who’ve taken part in a nationwide wave of renovations and quick resales using Federal Housing Administration-backed loans during the last four years.

The answer is yes: You can still flip and finance short term. But get your rehabs done soon. The federal agency whose policy change in 2010 made tens of thousands of quick flips possible — and helped large numbers of first-time and minority buyers with moderate incomes acquire a home — is about to shut down the program, FHA officials confirmed to me.

In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.

Since then, according to FHA estimates, about 102,000 homes have been renovated and resold using the waiver. The reason for the upcoming termination: The program has done its job, stimulated billions of dollars of investments, stabilized prices and provided homes for families who were often newcomers to ownership.

However, even though the waiver program has functioned well, officials say, inherent dangers exist when there are no minimum ownership periods for flippers. In the 1990s, the FHA witnessed this firsthand when teams of con artists began buying run-down houses, slapped a little paint on the exterior and resold them within days — using fraudulent appraisals — for hyper-inflated prices and profits. Their buyers, who obtained FHA-backed mortgages, often couldn’t afford the payments and defaulted. Sometimes the buyers were themselves part of the scam and never made any payments on their loans — leaving the FHA, a government-owned insurer, with steep losses.

For these reasons, officials say, it’s time to revert to the more restrictive anti-quick-flip rules that prevailed before the waiver: The 90-day standard will come back into effect after Dec. 31.

But not everybody thinks that’s a great idea. Clem Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, says reversion to the 90-day rule will hurt moderate-income buyers who found the program helpful in opening the door to home ownership.

“The sad part,” Ziroli said in an email, “is the majority of these properties were improved and [located] in underserved areas. Having a rehabilitated house available to these borrowers” helped them acquire houses that had been in poor physical shape but now were repaired, inspected and safe to occupy.

Paul Skeens, president of Colonial Mortgage in Waldorf, Md., and an active rehab investor in the suburbs outside Washington, D.C., said the upcoming policy change will cost him money and inevitably raise the prices of the homes he sells after completing repairs and improvements. Efficient renovators, Skeens told me in an interview, can substantially improve a house within 45 days, at which point the property is ready to list and resell. By extending the mandatory ownership period to 90 days, the FHA will increase Skeens’ holding costs — financing expenses, taxes, maintenance and utilities — all of which will need to be added onto the price to a new buyer.

Paul Wylie, a member of an investor group in the Los Angeles area, says he sees “more harm than good by not extending the waiver. There are protections built into the program that have served [the FHA] well,” he said in an email. If the government reimposes the 90-day requirement, “it will harm those [buyers] that FHA intends to help” with its 3.5% minimum-down-payment loans. “Investors will adapt and sell to non-FHA-financed buyers. Entry-level consumers will be harmed unnecessarily.”

Bottom line: Whether fix-up investors like it or not, the FHA seems dead set on reverting to its pre-bust flipping restrictions. Financing will still be available, but selling prices of the end product — rehabbed houses for moderate-income buyers — are almost certain to be more expensive.

kenharney@earthlink.net. Distributed by Washington Post Writers Group. Copyright © 2014, Los Angeles Times

The Boom-and-bust Fed’s Rental Society

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by Reuven Brenner

Now, as during World War II and up to 1951, the US Federal Reserve practiced what is now called quantitative easing (QE). Then, as now, nominal interest rates were low and the real ones negative: The Fed’s policy did not so much induce investments as it allowed the government to accumulate debts, and prevent default.

Marriner Eccles, the Fed chairman during the 1940s, stated explicitly that “we agreed with the Treasury at the time of the war [that the low rates were] the basis upon which the Federal Reserve would assure the Government financing” – the Fed thus carrying out fiscal policy. Real wages stagnated then as now, and global savings poured into the US.

With the centrally controlled war economy, there was no sacrifice buying Treasuries. Extensive price controls, whose administration was gradually dismantled after 1948 only, did not induce investments. Citizens backed this war, and consumer oriented production was not a priority. Black markets thrived, and the real inflation was significantly higher than the official one computed from the controlled prices.

Still, even the official cumulative rate of inflation was 70% between 1940-7. Yet interest rates during those years hovered around 0.5% for three-months Treasuries and 2.5% for the 30-year ones – similar to today’s.

When the Allies won the War, there were many unknowns, among them the future of Europe, Russia, Asia, and there was much uncertainty about domestic policies in the US too: how fast the US’s centralized “war economy” would be dismantled being one of them. As noted, the dismantling started in 1948, but the Fed gained independence and ceased carrying out fiscal policy in 1951 only.

Mark Twain said history rhymes but does not repeat itself. Though now the West is not fighting wars on the scale of World War II, there is uncertainty again in Southeast Asia and the Middle East, in Europe, in Russia and in Latin America. Savings continue to pour in the US, into Treasuries in particular, much criticism of US fiscal and monetary policies notwithstanding.

In the land of the blind, the one-eyed person – the US – committing fewer mistakes and expected to correct them faster than other countries, can still do reasonably. And although domestically, the US is not as much subject to wage and price controls as it was during and after World War II, large sectors, such as education and health, among others, are subject to direct and indirect controls by an ever more complex bureaucracy, the regulatory and fiscal environment, both domestic and international is uncertain, whether linked to climate, corporate taxes, what differential tax rates would be labeled “state aid”, and others.

Many societies are in the midst of unprecedented experiments, with no model of society being perceived as clearly worth emulation.

In such uncertain worlds, the best thing investors can do is be prepared for mobility – be nimble and able to become “liquid” on moments’ notice. This means investing in deeper bond and stock markets, but even in them for shorter periods of time – “renting” them, rather than buying into the businesses underlying them, and less so in immobile assets. Among the consequence of such actions are low velocity of money (with less confidence, money flows more slowly) and less capital spending, in “immobile assets” in particular.

As to in- and outflows to gold, its price fluctuations post-crisis suggest that its main feature is being a global reserve currency, a substitute to the dollar. As the euro’s and the yen’s credibility to be reserve currencies first weakened since 2008, and the yuan, a communist party-ruled country’s currency is not fit to play such role, by 2011 the dollar’s dominant status as reserve currency even strengthened.

First the price of gold rose steadily from US$600 per ounce in 2005 to $1,900 in 2011, dropping to $1,200 these days. And much sound and fury notwithstanding, the exchange rate between the dollar, euro and yen are now exactly where they were in 2005, with the price of an ounce of gold doubling since.

The stagnant real wages in Main Street’s immobile sectors are consistent with the rising stock prices and low interest rates. Not only are investors less willing to deploy capital in relatively illiquid assets, but also that critical mass of talented people, I often call the “vital few”, has been moving toward the occupations of the “mobile” sector, such as technology, finance and media.

Such moves put caps on wages within the immobile sectors. Just as “stars” quitting a talented team in sports lower the compensation of teammates left behind, so is the case when “stars” in business or technology make their moves away from the “immobile” sectors. Add to these the impact due to heightened competition of tens of millions of “ordinary talents” from around the world, and the stagnant wages in the US’s immobile sectors are not surprising.

This is one respect in which our world differs from the one of post-World War II, when talent poured into the US’s “immobile” sectors, freed from the constraints of the war economy. It differs too in terms of rising inequality of wealth. The Western populations were young then, hungry to restore normalcy, and able to do that in the dozen Western countries only, the rest of the world having closed behind dictatorial curtains.

This is not the case now: the West’s aging boomers and its poorer segments saw the evaporation of equities in homes and increased uncertainty about their pensions in 2008. They went into capital preservation mode with Treasuries, not stocks. At the age of 50-55 and above, people cannot risk their capital, as they do not have time and opportunities to recoup.

However, those for whom losing more would not significantly alter their standards of living did put the money back in stock markets after the crisis. As markets recovered after 2008, wealth disparities increased. This did not happen after World War II; even though stock markets did well, they were in their infancy then. Even in 1952, only 6.5 million Americans owned common stock (about 4% of the US population then). The hoarding during the war did not find its outlet after its end in stock markets, as happened since 2008 for the relatively well to do.

The parallels in terms of monetary and fiscal policies between World War II and today, and the non-parallels in terms of demography and global trade, shed light on the major trends since the crisis: there are no “conundrums.” This does not mean that solutions are straightforward or can be done unilaterally. The post -World War II world needed Bretton-Woods, and today agreement to stabilize currencies is needed too.

This has not been done. Instead central banks have improvised, though there is no proof that central banks can do well much more than keep an eye on stable prices. The recent improvised venturing into undefined “financial stability”, undefined “cooperation” and “coordination”, and the Fed carrying out, as during World War II, fiscal rather than monetary policy, add to fiscal, regulatory and foreign policy uncertainties, all punish long-term investments and drive money into liquid ones, and society becoming a “rental”, one, with shortened horizons.

Jumps in stock prices with each announcement that the Fed will continue with its present policies and favor devaluation (as Stan Fisher, vice chairman of the Fed just advocated) – does not suggest that things are on the right track, but quite the opposite, that the Fed has not solved any problem, and neither has Washington dealt with fundamentals. Instead, with devaluations, they have avoided domestic fiscal and regulatory adjustments – and hope for the resulting increased exports, that is, relying on other countries making policy adjustments.

Reuven Brenner holds the Repap Chair at McGill University’s Desautels Faculty of Management. The article draws on his Force of Finance (2002).

(Copyright 2014 Reuven Brenner)

 

Fed Officials Say Global Slowdown Could Push Back U.S. Rate Hike


U.S. Federal Reserve Vice Chair Stanley Fischer discussing the global economy.

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve officials on Saturday took stock of a slowdown in the global economy and said it could delay an increase in U.S. interest rates if serious enough.

Most notably, Fed Vice Chairman Stanley Fischer said the effort to finally normalize U.S. monetary policy after years of extraordinary stimulus may be hampered by the global outlook.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” he said at an event sponsored by International Monetary Fund.

Nevertheless, he said betting in financial markets on the timing of a U.S. rate hike appeared “roughly” on the mark given the Fed’s current expectations on how the economy’s recovery would unfold.

The IMF trimmed its global growth forecast ahead of its fall meetings this weekend, where discussions focused on ways to stimulate global demand and prevent the euro zone from slipping back into recession.

“I am worried about growth around the world, there are more downside risks than upside risks,” Fed Governor Daniel Tarullo said at a conference the Institute of International Finance sponsored on the sidelines. “This is obviously something we have to think about in our own policies.”

Chicago Federal Reserve Bank President Charles Evans said a strengthening of the dollar and weak growth abroad could mean slower inflation in the United States, and less justification for the U.S. central bank to raise rates.

The renewed concerns about Europe could represent a serious complication for the Fed, which had been expected to begin bumping up benchmark borrowing costs in the middle of next year.

Fischer spoke in part to calm concerns among developing nations about a potential tightening in U.S. monetary policy, saying the Fed would only move rates higher if the U.S. economy was ready for it. Overall, he said, rising borrowing costs in the United States were unlikely to disrupt flows of capital and investment around the world.

“The normalization of our policy should prove manageable,” Fischer said. “We have done everything we can, within the limits of forecast uncertainty, to prepare market participants for what lies ahead.”

“In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects.”

Large developing nations like India and Brazil have been concerned a rise in U.S. rates could suck investment away from their economies, just as they earlier criticized the Fed’s bond-buying stimulus as a “currency war” that caused a fast increase in their currency values.

Fischer said in the keynote IMF address that the Fed’s crisis programs, which pumped trillions of dollars into global markets, have on the whole benefited the rest of the world.

“The net effect on foreign economies appears to be both modest in magnitude and most likely positive, on net, for most countries,” he said.

In addition, he said U.S. central bank officials have given national governments and investors plenty of time and clear signals to prepare for a shift in policy.

The Fed is “going to great lengths to communicate policy intentions,” Fisher said. “Markets should not be greatly surprised by either the timing or the pace of normalization.”

(Reporting by Howard Schneider; Additional reporting by Jason Lange and Douwe Miedema; Editing by Andrea Ricci)