While many economists thought such fears wildly exaggerated -- “all that was crazy stuff,” former IMF chief economist Olivier Blanchard said -- they were worried that the pessimism could feed back into the economy by turning consumers and companies more cautious with their cash.
Central bankers have managed to short-circuit that feedback loop, at least for now.
China denied it planned a big yuan devaluation and pledged to do more to boost its economy. European Central Bank President Mario Draghi rolled out a multi-pronged stimulus package that helped restore some investor faith in policy makers’ powers after a botched attempt by Bank of Japan Governor Haruhiko Kuroda called them into question.
And Federal Reserve Chair Janet Yellen and her colleagues did their part by scaling back the number of rate increases they expect to carry out this year, pointing to the risks posed by “global economic and financial developments.” The commodity markets also cooperated, as a rebound in oil prices helped allay concerns that world demand for crude -- and for everything else -- was collapsing.
“We are at an inflection point on inflation,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. “The risks are shifting from downside surprises on inflation to watching out for upside surprises.”
He sees the U.S., particularly American consumers, leading the way for an eventual improvement in global growth. U.S. households are benefiting from a tightening jobs market that is starting to push up wages of some workers.
Risks remain, though -- some of officials’ own making.
China has been propping up a yuan that IHS Inc. chief economist Nariman Behravesh estimates is 15 to 20 percent overvalued, meaning that dangers of a devaluation haven’t disappeared.
The country’s short-term efforts are contributing little to tackling its long-run problem of too much leverage. Moody’s Investors Service highlighted China’s surging debt burden in lowering the nation’s credit-rating outlook to negative from stable earlier this month.
Fed Tightening