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Fed-driven 'Locomotive USA'

Andrew Harrer | Bloomberg | Getty Images

No other country buys more than it sells to the rest of the world: America's net contribution to the growth of the world economy in the first eight months of this year amounted to $480.8 billion, or about 3 percent of its gross domestic product (GDP).

And here is a striking contrast: Germany, the world's fourth-largest economy, is currently getting a net contribution from the rest of the world to the tune of $280 billion -- nearly 7 percent of its GDP.

Not even China is sucking so much demand out of the world economy. In the year to the second quarter, China's trade surplus is estimated at about 2 percent of its GDP.

Those taking potshots at the U.S. government's foreign policy have a point here that could strongly resonate with the American public, because exports directly or indirectly support more than 11 million American jobs, or close to one-tenth of the country's latest employment numbers.

It might, therefore, be a good idea to help the Fed's efforts to steady the economy by getting Germany, China and other large surplus countries to generate more growth from their domestic demand. We may then be able to sell them something instead of being their dumping ground: In the first eight months of this year, our trade deficits with Germany and China were up 14 percent and 4 percent, respectively, from the year earlier.

Read MoreChina GDP beats, but growth rate slowest since crisis

Surplus runners like the U.S. election cycle

But don't hold your breath for such actions by Washington, or by multilateral agencies whose job it is to ensure balanced trade relationships in the world economy. Nothing of the sort will happen.

As in the past, large trade surplus countries won't budge. They know that during the forthcoming elections -- starting with the mid-term Congressional elections next month and culminating with the U.S. presidential contest in 2016 -- the Fed will do everything possible to keep economy and employment in a reasonably good shape.

That, of course, means that the locomotive USA will be an increasingly steady pillar of global output, and an expanding market for export-led economies.

Germany's sinking economy, for example, will continue to force local companies to seek salvation on external markets. An apparently rising political hostility with Russia seems to be turning German businesses toward an open, properly regulated and welcoming American market.

Problems with China will also cause Germany to lower its formidable export boom on the U.S. That is a conclusion one may draw from the analysis of Sebastian Heilemann, a prominent German sinologist and a director of the Mercator Institute for China Studies (MERICS) in Berlin. Ominously, he is talking about the "dark clouds" in Chinese-German relations, saying that German companies are suffering from Chinese (get the euphemism) "reverse engineering," and from increasing administrative difficulties of doing business in the Middle Kingdom.

Read MoreWhere did the German 'strongman' go?

American companies operating in China have been reporting the same issues for years. It is possible, therefore, that problems of doing business in China and rising production costs may slow down Chinese exports to the U.S.

That could happen. But even if it does, it is unlikely to significantly affect the dampening impact of trade deficits on the U.S. economy as long as a stagnant, German-led E.U. relies on foreign sales to keep afloat. At the moment, the E.U. accounts for one-fifth of America's trade gap.

Fed fighting the trade drag

With no help from fiscal policy, the Fed will continue to fight alone against the headwinds of adverse net exports, which shaved off 2 percentage points (at annual rates) from the U.S. economic growth in the first half of this year.

Recent statements from various Fed officials indicate that they are aware of the difficulty posed by weak external demand. Some of them are suggesting that future interest rate hikes could be postponed if trade deficits became a serious impediment to growth and employment creation.

So far, the Fed has been gradually withdrawing excess liquidity, but its interest rate signals remained unchanged. The effective federal funds rate is still held in a 0-0.1 percent range – which is considerably below the official 0.25 percent target.

Read MorePhilly Fed's Plosser urges earlier Fed rate rise, mum on marketturmoil

If you are looking for the profile of the unfolding policy shift, watch the pace of contraction of the monetary base (M0), the right-hand side of the Fed's balance sheet and the only aggregate it directly controls. It seems that September marked a turning point because M0 shrank by $25.8 billion from the previous month. That brought down the growth of this key measure of money supply to an annual rate of 16 percent, compared with 20 percent in recent months.

But the conundrum of banks' huge excess reserves (i.e., loanable funds) is still there. They stood at $2.7 trillion at the last count on October 15. A slight acceleration of bank lending to households in July and August (+6.6 percent year-over-year) is still leaving an enormous lending potential intact, while nonbanks continue to do nearly two-thirds of consumer financing.

I hope that the Fed's announcement of stringent stress tests (simulating a 60 percent decline in stock prices, a 25 percent drop in real estate values, a 10 percent unemployment rate and a 4.5 percent recession) will not trigger a sharp withdrawal of banks' lending to consumers – as was the case in the run-up to similar tests in the euro area.

That would be an unfortunate turn of events. Indeed, the Fed's policy has been making a stronger contact with real economy in the first half of this year, but we are still far from the point where the economic activity could sustainably move along a path that is consistent with its physical limits to growth.

Jobs and income numbers are too weak. The actual unemployment rate in September was exactly double the reported rate of 5.9 percent. And the 2.4 percent growth of the disposable personal income (corrected for inflation) in the first half of the year is just a modest rebound from a decline during last year.

Read MoreUS created 248,000 jobs in Sept

Both of these variables lack the strength to lift private consumption and residential investments (three-quarters of the economy) to a growth rate above 2.3 percent observed in the first two quarters.

Investment thoughts

A sustainable revival of output and employment in the U.S. is still very much a work-in-progress, critically depending on a broad and relatively easy access to affordable credit conditions.

That is the Fed's mission. Equating that mission, as some market observers do, with the Fed's alleged intent to keep pumping up the equity market is an unfair simplification.

I expect that the Fed's support to the growing U.S. economy will lead to increasing corporate earnings. With cyclically-induced productivity gains and subdued labor costs, that should continue to generate profits and investment value.