Deja Vu All Over Again: How the Fed Might Respond to a Familiar Crisis in Asia

  • Thursday, August 27, 2015

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As the Chinese market (and the Asian economy) have faltered, comparisons between current conditions and 1998’s Asian debt crisis aren’t lacking–and for good reason.

Credible parallels certainly exist.

Now, as then, American economic growth is outpacing global averages and the drawbacks of Asian command and control policies are manifesting in the market. The Fed and the Asian economy are also exhibiting similar trends:



Putting the Fed Index (the Fed’s quantified “mood,” negative numbers indicating dovishness and positive numbers indicating hawkishness) alongside the Shanghai Stock Exchange Index (SSEC), the graphs above demonstrate that the Fed’s mood in 1998–and of course the performance of the market–also roughly correlate with current events.

Similarities duly noted, the differences make a strong case for the overall novelty of the current events. Those debt-ridden countries hardest hit in the late nineties are actually the safer bet these days than China. And, outstripping the markets that caused 1998s crisis, China’s economy has far more global weight than those so-called “tigers” did.

The current downturn, therefore, represents a different kind of threat.

But it’s not all bad news. Despite its current woes, China can still be reasonably expected to maintain 6% growth for the near future and 4-5% growth for the long term. It may not be the economic explosion we’ve grown accustomed to with China, but these numbers still represent real growth.

While today may not be the mirror-image of 1998, the Fed may use a similar playbook.


Despite strong domestic growth, the Fed cut rates 3 times in the latter months of 1998. During that stretch we saw Fed sentiment (see graph above) peak mid-summer, decline in August and September, rebound in late September through October and fall again in November and December. The Fed’s mood did not match its pre-Asian crisis peak until early 1999.

At the time, it seemed that the Fed’s preemptive action steered the U.S. economy safely through trouble, but the fallout from the tech bubble of the early 2000s made a simple lesson more complicated. Now it seems that seems that loose policy is double-edged sword.

Given the advantage of history, how will the Fed approach this problem? Will the Fed loosen (or keep loose) policy when contagion is a possibility or–because lax policy is exactly what helped fuel the tech bubble–will the central bank tread more carefully?

Early indications, as evidenced by recent comments by New York Fed President William Dudley, suggest that the Fed is following the former strategy. If Dudley’s remarks are indicative of the Fed’s mood–and if the parallels to 1998 are real–then we will likely not see a rate hike until early 2016.

Bottom Line: This time may be different, but it could play out a very similar way. We will be monitoring the situation closely to provide scores on Asian markets as well as indications about how these systemic factors will influence Fed rate liftoff here in the U.S.

The Prattle Team,
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