Fed sends shock waves with rate hike sched­ule

China Daily (Hong Kong) - - COMMENT -

The US Fed­eral Re­serve raised the bench­mark in­ter­est rate by 25 ba­sis points on Wednesday, and in­di­cated there could be three more hikes next year. The an­nounce­ment trig­gered im­me­di­ate fluc­tu­a­tions in global cur­rency, bond and stock mar­kets. It is not this hike that has un­set­tled the mar­kets, as this has long been an­tic­i­pated and priced in; it is the Fed’s pro­posed pace of hikes next year. Although the Fed has been known for be­ing change­able in mak­ing in­ter­est rate de­ci­sions, its pro­posed ac­cel­er­ated in­ter­est rate hike cy­cle for next year will have ma­jor reper­cus­sions for the global economy.

His­tor­i­cally, an in­ter­est rate hike by the Fed is ac­com­pa­nied by a rise in the value of the dol­lar, which in turn leads to mas­sive in­ter­na­tional cap­i­tal flows across bor­ders in search of greater gains. This can un­der­mine the fi­nan­cial sta­bil­ity of other coun­tries. US in­ter­est rate hikes were one of the ma­jor con­trib­u­tors to the erup­tion of the Asian fi­nan­cial cri­sis in the late 1990s and its own sub-prime mort­gage cri­sis in 2008.

If the Fed raises in­ter­est rates three times next year, it is pre­dictable that there will be more tur­bu­lence in the global fi­nan­cial mar­kets that will af­fect emerg­ing-mar­ket economies the hard­est at a time when they will also be fac­ing the chal­lenge of the in­ward-look­ing trade poli­cies that Don­ald Trump has been promis­ing to in­tro­duce when he en­ters of­fice.

Given the huge clout US mon­e­tary pol­icy has on the global economy, it is to be hoped the coun­try’s pol­i­cy­mak­ers take heed of the po­ten­tial spillover ef­fects of its mon­e­tary poli­cies and co­or­di­nate with other coun­tries to min­i­mize any ad­verse im­pacts.

Es­pe­cially since the global economy has yet to shake off the fall­out from the fi­nan­cial cri­sis that orig­i­nated in the US eight years ago, and the United King­dom’s with­drawal from the Euro­pean Union that will bring fresh un­cer­tain­ties.

While the US has en­joyed rel­a­tively strong growth mo­men­tum and the Fed ex­pects that to con­tinue, other coun­tries are still strug­gling.

As Janet Yellen, the Fed chair, ac­knowl­edged on Wednesday, “we are op­er­at­ing un­der a cloud of un­cer­tainty at the mo­ment and we have time to wait to see what changes oc­cur and to fac­tor those into our de­ci­sion-mak­ing as we at­tain greater clar­ity.”

Bear­ing that in mind, the in­com­ing US ad­min­is­tra­tion should avoid any beg­gar-thy-neigh­bor poli­cies and in­stead look to the big pic­ture, be­cause any eco­nomic woes in other parts of the world will af­fect the over­all world economy, ul­ti­mately un­der­min­ing its own ef­forts to turbo boost the US economy.

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