Is a financial crash looming? Matein Khalid explains

If Dr Yellen waits for the Chicago bond market vigilantes from the 1990s to be resurrected, global markets will go ballistic.

It is highly dangerous to trust the wisdom, prudence or even the policy consistency of the US Federal Reserve, the most powerful central bank in the world and the de facto lender of the last resort to the global banking system. Alan Greenspan lobbied for the repeal of the Glass Steagall Act and ignored the calamitous build up of leverage in the balance sheet of Wall Street banks under his tenure. His successor, Ben Bernanke insisted "subprime will be contained" even while it was obvious to the cognoscenti that the complex, toxic credit derivatives markets that Dr Greenspan (the Maestro in his time, Bubbles in my lexicon!) inspired had run amok on Wall Street, a financial Frankenstein that threatened to gut the capital of the world's largest investment banks. Janet Yellen has now added to the Fed's long list of strategic blunders by not raising interest rates earlier in 2015 as the US unemployment rate plummeted to 5.1 per cent. Her failure to raise rates at the September FOMC meeting and ultra-dovish monetary policy will, I fear, lead to a financial crash in the next six months.
There is now open dissent against Dr Yellen in the Federal Open Market Committee. While the Fed has shifted its forecast for the equilibrium overnight borrowings rate lower to 3.46 per cent from 3.64 per cent due to China/emerging market woes, the logic of its dual mandate and US macroeconomic momentum argues for a December rate hike. With record US car sales, higher home prices and construction spending, pre-crisis lows in the unemployment rate, a rise in bank loans and credit card debt, the Fed risks being "behind the curve" if it does not move to hike the overnight borrowing rate. If Dr Yellen waits for the Chicago bond market vigilantes from the 1990s to be resurrected, global markets will go ballistic. The message of the softer US dollar, surge in crude oil and metal prices, speculative bonds and high beta emerging markets currencies like the Indonesian rupiah and Brazilian real demonstrates the dangers of "irrational exuberance" in monetary policy.
Dr Yellen uses convoluted logic to diss the tightness in US labour markets, which vice-chairman Stan Fischer and San Fran Fed president John McWilliams know all too well have gone beyond a FOMC rate hike trigger point. There is now clear evidence of first round pricing pressure in high-end jobs in strategic areas such as software engineering and healthcare, even if the US shed 102,000 oil and gas drilling jobs in 2015. The Federal Reserve should never have allowed financial markets to become so complacent about policy, to accumulate leverage on such a colossal, intercontinental scale. This lack of policy coherence guarantees major financial markets price risk aversion spasms and a spike in volatility when the Fed is finally forced to act.
As the new interest rate hike cycle begins (the last one, under Bernanke, led to 17 successive hikes and a 425 basis points rise in the Fed Fund rate) at a time of fragile global growth, the $18 trillion debt tsunami in emerging markets debt will wreck havoc on global investors. Expect debt reschedulings, bank failures and sovereign defaults in emerging markets and a rise in high yield debt defaults. This much, at least, is certain.
The Federal Reserve engineered the exponential rise in the valuations of the US stock market since 2009 after Dr Bernanke expanded the Fed's balance sheet from $900 billion to $4.5 trillion to prevent another Great Depression after the Wall Street credit seizures of 2008. Yet the US banking system is now recapitalised and the US economy will overheat with the Yellen Fed's protracted dose of "free money". The US consumer, with its $12 trillion spending power, is the growth engine of the global economy. US monetary policy tightening is inevitable. By delaying it for so long, the Yellen Fed has damaged its own credibility as well as the world's odds of avoiding storm clouds on the path to monetary normalisation.
I cannot see how King Dollar can be dethroned in a world where the Fed hikes but the ECB, the Bank of Japan and even the People's Bank of China prints money to revive sluggish domestic economies. Expect credit markets spreads to widen as global liquidity contracts amid an exodus of offshore capital from emerging markets. China abandoned its yuan peg in August and ignited a global "beggar thy neighbour" currency war even as Asian/world trade shrinks. This means fresh carnage for the emerging markets and commodities.