This week, stay close to a phone as global central bankers gather to find a solution to market crisis
Forgotten amid Donald Trump’s trade war insanity and diplomatic dumpster fires was Asia’s biggest fear entering into 2018: an aggressive US Federal Reserve.
Six months into his Fed chairmanship, Jerome Powell has been the picture of calm, probity and reason. His team only raised interest rates twice, 25 basis points in March and another step in June to a target of between 1.75 per cent and 2 per cent.
But is the Fed about to reprise its role as the Asian spoiler? The odds are rising with a US economy firing on all cylinders, and a US$1.5 trillion tax cut adding fuel.
We’ll learn just how much on Friday,when Powell headlines the Fed’s annual Jackson Hole retreat in the majestic mountains of Wyoming.
There’s nothing majestic about world markets, though, as Trump’s tariffs throw China, Turkey and any number of Asian “allies” off balance. Singapore is warning about a rocky second half. South Korea is seeing a marked downshift in exports and capital spending.
In Tokyo, Trump’s best pal anywhere, Prime Minister Shinzo Abe just saw exports to America plunge 5.2 per cent in July from a year earlier. It’s not an exaggeration to say shipments of cars skidded off a cliff - by 12.1 per cent. That, even before Trump’s proposed 25 per cent tax on all auto imports is enacted.
Accelerated Fed tightening, arguably warranted by drum-tight labour markets, would create quite the dilemma for Asia. For one thing, it would increase the gap between US bond yields and those of developing economies.
Another 1997-like Asian Financial Crisis is wildly unlikely, but higher US rates and a rising dollar are causing control problems for twin-deficit economies - those carrying both budget and current-account imbalances. That puts India, Indonesia and the Philippines at a disadvantage to China, Japan, South Korea and Taiwan.
Look no further than Bank Indonesia, which last week hit the brakes for the fourth time since May to support the rupiah. Or the Philippine central bank announcing its largest rate increase in a decade. The Bank of Korea’s preference is to tighten later this month.
China and Japan are leaning the other way. The People’s Bank of China reopened the credit spigot, a move aimed at counteracting the fallout from Trump’s 25 per cent tariffs on US$50 billion of Chinese goods. Almost daily, he threatens to up the ante to as much as US$500 billion. The Bank of Japan, meantime, says it remains committed to “continuous powerful monetary easing.”
Here’s where the Trump effect clouds the outlook. As the dollar rises, the yuan and yen are weakening in ways that might enrage Trump. Since last month, he is hinted via tweets and interviews that he’ll be displeased if the Powell Fed continues to tighten. It’s a wildly unique turn of events for an intensely independent institution.
Hence the importance of Powell’s speech this week. Each August, these Wyoming confabs draw top monetary policy and government officials from around the globe. And often, they coincide with market crackups.
In 1997, central bankers were there in Wyoming when contagion from Thailand’s baht devaluation a month earlier had begun to slam Wall Street. A year later, the Jackson Hole Lodge was the site of strategies about Russia’s default and the imminent collapse of hedge fund Long-Term Capital Management. Ten years later, the talk there was about credit-market dislocations that would soon undo Lehman Brothers.
This week, central bankers will talk about Turkey, Trump’s trade war and what might go wrong next. Yet no question looms larger than whether Powell is keen to be a Trump yes-man or do his job and accelerate rate hikes.
Anyone planning a holiday might want to stay close to a phone.
William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s