US Federal Reserve decision on rates just a temporary reprieve

PUBLISHED : Saturday, 19 September, 2015, 1:36am
UPDATED : Saturday, 19 September, 2015, 9:59pm

After months of feverish speculation, the world's most powerful central bank has decided to hold rates unchanged.

The US Federal Reserve will maintain rates at the 0 to 0.25 per cent target range, thereby continuing, at least for now, the zero-rate environment since the outbreak of the global financial crisis more than seven years ago.

Fed chairwoman Janet Yellen said the global downturn may "restrain US economic activity" and force down inflation. She especially cited the slowdown in China as a matter of concern.

Clearly China's recent devaluation of the yuan, its stock market rout and continuing decline in manufacturing activities have spooked everyone, including the US Fed.

Despite the slow but significant recovery of the US economy, Fed officials are mindful of serious headwinds from overseas and have decided to take a cautious approach by holding rates unchanged.

For borrowers in Hong Kong, especially those planning on taking out a flat mortgage, the Fed's decision offers a temporary reprieve. But it is no time for them to be complacent.

As Norman Chan Tak-lam has warned, the era of super-low interest rates and borrowing costs is coming to an end despite the Fed's latest decision. Those who plan to buy flats, the head of Hong Kong Monetary Authority said, must first assess their ability to make mortgage payments as we are about to enter a rising-rate cycle.

As Yellen said during a conference yesterday, a rate rise was still a possibility this year, but that would depend on new economic figures for the data-driven Fed. Some veteran Fed watchers, though, now predict a rise to occur only next year.

The decision to hold rates constant may have calmed markets for now. But uncertainty about the timing of the next rate hike matters in its own right because it can significantly contribute to market volatility. That's why Raghuram Rajan, the US-trained governor of India's central bank, has said the Fed should raise rates now and be done with the guessing game and uncertainty.

Perhaps equally important for borrowers and mortgage holders is not just the timing of the rate hike but how many times the Fed will raise rates consecutively.

Given how mindful Fed policymakers are of the fragile state of the world economy, it is doubtful they will raise too many times. People may at least take comfort from that.