Fed move prolongs market uncertainty
Some Asia-Pacific central bankers on Friday said the US Federal Reserve’s (Fed) decision not to raise historically low interest rates due to global economic uncertainty actually added to that uncertainty rather than contained it.
Australian policy makers expected more global market volatility as result of the Fed decision to continue its stimulus campaign and urged the American central bank to consider the impact of its decisions on emerging markets.
"There is a degree of irreducible uncertainty here and hence the possibility of further financial market volatility at some point," Reserve Bank of Australia Gov. Glenn Stevens told a parliamentary hearing Friday.
Bank Indonesia Senior Deputy Governor Mirza Adityaswara reiterated his previous stance that the sooner the Fed raises rates the better it would be for emerging markets. Such a move would "create stability in emerging countries so that we can continue developing and reforming our economies, " Mr. Adityaswara wrote in a text message to a Wall Street Journal reporter. "It’s difficult to carry out economic reform if the monetary system is in perpetual turmoil."
The US Federal Reserve’s decision to stand pat on rates will prolong volatility in emerging-market currencies including the rupiah, Indonesia Finance Minister Bambang Brodjonegoro said. "Actually the dollar’s current level against other currencies has already priced in a rate increase," the minister added, suggesting that Indonesia’s economy will be able to absorb a rate liftoff. He argued that a US rate increase confirm a US economic recovery, which would be good for China. "A pickup in China’s economic growth will have positive effect on Indonesia," the minister stated.
Bank of Korea Governor Lee Ju-yeol told commercial bankers in Seoul that "markets hate uncertainty, but uncertainty still remains."
Those reactions came despite broad recognition that a Fed increase of short-term interest rates might have prompted investors to pull money out of emerging markets countries in Asia. Many investors believe the Fed will still raise rates this year for the first time since 2006, intensifying the strain on developing nations that in many cases already are struggling with slowing growth, substantial debt and crumbling demand for commodities.
Some Asian policy makers appeared to support the Fed’s decision.
The Bank of Japan declined to comment. But the Fed’s postponement of any retreat from its stimulus campaign likely reassured BOJ officials already struggling with fallout from emerging market weakness.
Although BOJ Gov. Haruhiko Kuroda’s previous remarks gave investors the impression that he favored an early rate raise by the Fed, many senior BOJ officials were against it, people close to the bank said. They felt that there was no compelling reason for the Fed to tighten monetary policy given limited inflation risks and the threat of harming both US and emerging economies.
And in the Philippines, Bangko Sentral ng Pilipinas Gov. Amando Tetangco said emerging markets with strong fundamentals would get a lift from the Fed decision, saying attention will shift focus to the actions of China’s monetary authorities to address that country’s slowing economic growth.
However, even Mr. Tetangco said the Fed could have made a small raise to take it "off the market’s mind."
The People’s Bank of China didn’t issue any statement after the Fed’s meeting. But China sought to reassure markets this week that even if a US interest rate increase occurred it wouldn’t take an undue toll on the financial system of the world’s second-largest economy. While any increase could put pressure on China’s currency, it wasn’t likely to trigger major capital outflows, said Wang Yungui, a director of the regulation department of China’s State Administration of Foreign Exchange at a regular briefing on Thursday, ahead of the Fed meeting.
Mr. Wang said China’s large trade surplus and economic growth rate of around 7% year-over-year are high by global standards, making the country attractive to investors.
While China has rattled global markets in recent months with its gyrating stock markets and its the unexpected decision to devalue its currency last month, economists said it is better positioned than most other emerging economies to weather an eventual US rate increase given its $3.6 trillion in foreign reserves, largely closed capital markets, low short-term foreign debt levels and low central government debt.
Policy makers of smaller economies appeared to be more unsettled.
"Emerging market countries need financial market stability to enable their economies to run smoothly, whereby banks are back to lending, corporations are confident to expand their businesses," wrote Mr. Adityaswara of Indonesia. "The dominant factor since 2013 that has been affecting the financial market stability in emerging markets is the uncertainty of the timing of the Fed rate increase." (WSJ)