In football, most offensive plays are called in the huddle. When the offense lines up and the quarterback doesn’t like what he sees in the defensive formation, he may, from time to time, “call an audible.”  Peyton Manning is one of the more famous quarterbacks for calling an audible with his waving of arms and yelling of phrases like “Omaha”.

Last Thursday, at the conclusion of two days of meetings, the Federal Reserve made an intelligent choice based on the facts put before them—they “called an audible.”  They declined to raise interest rates even though the “original play” was to raise rates once US unemployment improved satisfactorily.  This week we examine that decision and look in depth at the reason for that decision—China.

Look to China for clues.  The world’s two largest economies are locked in a symbiotic embrace. The Fed remains reluctant to raise rates because of worries about China and its impact on the global economy.  It is hard to see a clear resolution to China’s issues in the next three months, according to John Authers of The Financial Times

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Lower for even longer.  Before last week’s Fed meeting Jeffrey Gundlach, founder of Doubleline Capital, did not think rates would be increasing anytime soon.  In an interview he presented several economic factors preventing the Fed from acting, at least in the near future, citing economic weakness, market vulnerabilities ,and lack of inflation, all stemming from what’s going on in China.

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China’s Crisis:  The Price of Change.  China is in the midst of what may be its most serious crisis since the days of Deng Xiaoping.  The government and economy Deng put in place is no longer effective at managing China.  While appearing to provide calmness on the surface the Deng model belied disturbing deeper currents, according to Stratfor, a geopolitical weekly [Republished with permission of Stratfor].

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J. Mark Nickell & Co.

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