In the current cycle, the derivatives boom, the ascent of London as a capital base, and China/Petro-sovereigns as enormous players have weakened the Fed's ability to understand, let alone influence, events.

I happen to believe that derivatives' stabilizing influence (via risk distribution) is a good thing. Self-interest is likely, in the short term, to make China and other sovereigns play nice.

But the days of Pax Federalis are fading into history, and we are headed into new seas that will offer a different mix of opportunities and risks.

Jeff Sasmor asks:

So at some time in the future will we no longer wait with bated breath for the Fed's interest rate decisions, or its Minutes releases?

Will the markets eventually discount the Fed's effect, at least to some degree? That sounds like the consequence of the idea behind George's essay.

George Zachar replies:

The Fed's influence, at the moment, is waning.

Perhaps the ECB will supplant them as the global marginal rate setter. Perhaps China will start treating the capital markets the way Putin is now treating Estonia. Perhaps the Fed will grow a pair and re-seize the initiative. Perhaps gold will re-take its former place at the center of the monetary universe.

I don't pretend to know where this cycle will lead, but I am keeping my eyes and my mind open.


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