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Federal Reserve

Homebuyers should be cautious as US Federal Reserve actions add to uncertainties

While rates have risen, the real impact of the Fed’s action is yet to come as it prepares to unload trillions of dollars in assets it bought after the last financial crisis

PUBLISHED : Saturday, 17 June, 2017, 12:32am
UPDATED : Saturday, 17 June, 2017, 12:32am

While the news headlines have been mostly about the US Federal Reserve’s decision to lift rates by a quarter point, perhaps by far the greater impact will be its announcement of a determined effort to shrink its massive balance sheet. Raising the key short-term interest rate by another 25 basis points to a range of 1 per cent to 1.25 per cent has been a well-advertised move. The market consensus is that there will only be one more increase this year. As a result, global markets, including those in Hong Kong, were little perturbed.

The city has been running on high liquidity. Flush with cash, local banks are in no hurry to raise rates, despite the Hong Kong Monetary Authority’s move to follow the Fed by raising its own base rate by 0.25 percentage points.

Far more concerning will be the determined tone of the Fed to normalise monetary policy by reducing the massive US$4.5 trillion in assets sitting on its balance sheet, accumulated following the outbreak of the global financial crisis a decade ago. While such normalisation makes good sense for US policymakers, it will have an inevitable heavy impact on asset prices across the globe and on exchange rates in emerging markets as capital inflows reverse course.

Federal Reserve, as expected, raises US interest rates by 25 bp

In Hong Kong, the overheating property market will be vulnerable. On the mainland, the risks of a hard landing will increase. The People’s Bank of China, the nation’s central bank, faces some difficult decisions ahead. Many mainland financial institutions are already facing tighter liquidity thanks to the continuing regulatory crackdown. Should the Chinese central bank follow the Fed and tighten policy rates, some institutions may come under unbearable pressure.

On the other hand, it is unlikely the central bank will loosen monetary policy to any large extent as that would nullify the hard-earned results of its crackdown to impose discipline on financial institutions. Most likely, the central bank will continue to play a delicate balancing act by reducing financial leverage without demoralising investors too much.

Hopefully, the Fed’s tightening will remain slow and gradual, thereby allowing more time for China’s foreign exchange reserves to rebound, the yuan to stabilise and capital outflows to moderate.

In the end, the successes of Beijing in deleveraging the system and stabilising economic growth on a downward trend – thereby avoiding a hard landing – will have far greater impact on Hong Kong’s markets, including real estate, than any gradual tightening of interest rates by the Fed.

So much remains uncertain about the directions of the world’s two largest economies that it makes sense for Hong Kong investors and homebuyers to be especially cautious in the coming months.