MonitorFed's zero interest rate hurts Asia and may not help the US
Federal Reserve's rock-bottom approach feeds inflation in developing countries – and might even prolong the downturn in America
Speaking in Hong Kong this week, Charles Evans, head of the Federal Reserve Bank of Chicago, reiterated the Fed's pledge to keep US interest rates at rock-bottom levels for the medium term.
With US inflation set to remain below 2.5 per cent, the Fed's benchmark rate will remain at zero until economic recovery is well entrenched and the unemployment rate falls below 6.5 per cent.
With US unemployment currently at 7.8 per cent, that implied interest rates were likely to remain at zero until at least the middle of 2015, Evans said.
For Hong Kong, with its currency peg to the US dollar, that means another two years of ultra-low mortgage rates exerting upward pressure on local home prices.
For much of the rest of Asia, it also means continued financial stresses. Over the past few years, hedge funds and other investors have taken advantage of the Fed's policy to borrow in US dollars and invest the money in emerging markets.
This carry trade has pushed regional currencies sharply higher and forced policymakers from developing countries to keep their own interest rates artificially low in an attempt to deter inflows of hot capital.