Risks ahead for the Fed: oil prices, Ukraine, and Eurozone debt

Rising risks to the global economic outlook

by Desmond Lachman

One has to be struck by the basic disconnect between current global financial market prices and underlying global economic and political fundamentals. Similarly one has to be struck by how little attention the Federal Reserve seems to be paying to rising global risks in its assessment of the U.S. economic outlook. For at a time that a confluence of unusually serious global economic and political risks are rearing their ugly heads, global equity and credit markets reach new highs. Similarly, far from removing the proverbial punchbowl as the party gets going, the Fed has given the markets the green light to continue partying by remaining in denial about growing global economic and political risks.

Among the more serious risks that both the market and the Fed seem to be downplaying relate to the longer-run security of Middle East oil supplies. This is all the more surprising considering the tectonic changes that appear to be occurring in the Middle East. After all, the U.S. appears to have lost the political willingness to impose order abroad at the very time that Iraq, OPEC's second-largest oil producer, appears to be splitting apart along sectarian lines. Meanwhile, Islamic fundamentalism appears to be on the rise, Iran proceeds with its nuclear program, and Syria's civil war continues unabated. ne would have thought that markets would have been particularly concerned about the risk of an oil price shock since it is one to which the Federal Reserve would have difficulty in responding. For any significant increase in international oil prices above their present already elevated levels would both hamper an already weak economic recovery while at the same time increasing the risk of un-anchoring inflationary expectations. In those circumstances, the Fed would be wary of any easing of monetary policy to support economic growth for fear of validating incipient inflationary pressures.

A second risk to which the market seems to give but fleeting attention relates to any future intensification of the Ukrainian crisis. This would seem to be particularly surprising considering both the risks that the Ukrainian crisis might pose to European energy supplies from Russia as well as the risk that further

................

Read more:thehill.com