Market volatility jumped in August, on fears of a more rapid decline in China’s economy colliding with a potential tightening cycle by the Federal Reserve. Recoveries in Europe and Japan are struggling to establish momentum. Major banks around the world are working to maintain “stress test” capital standards. Central banks are working to maintain needed reserves. A tightening cycle reduces world liquidity. Rising US interest rates create Treasury bond losses that reduce capital/reserve levels in the world banking system. Thus, all are potentially impacted by the start of a Fed tightening cycle.
What about the US economy, which has not yet replaced the credit availability/expansion potential available from its banking system that was lost after 2008? During its subsequent, sub-par recovery , the economy has had to rely on capital markets for credit as well as non-bank lenders such as peer to peer lenders. Starting a tightening cycle without the availability of normal bank credit expansion could send the “goldilocks economy” back into recession!