Federal Reserve

US Fed right to keep key interest rate unchanged at a time of global economic uncertainty

Longer term, borrowers should remain prudent in their financial dealings, because sooner or later rates will rise

PUBLISHED : Friday, 18 March, 2016, 1:02am
UPDATED : Monday, 30 May, 2016, 2:19pm

Investors have had little good news to cheer this year amid uncertainty over global growth. So even a widely expected deliverance from unwelcome news can lift the spirits, as it did yesterday when markets rose after the US Federal Reserve confirmed it was holding its benchmark interest rate at a notch above zero. A week before Christmas, the Fed struck early against the perceived risk of sharply higher inflation later this year with a pre-emptive rate rise of 0.25 per cent. At that time, Fed policymakers anticipated up to four rises this year to ensure inflation rose only gradually to their target of 2 per cent.

But Fed chair Janet Yellen did not reckon with a change in the global outlook wrought by falling stock and commodities prices and slowing growth and policy uncertainty in China. As a result, markets were already expecting a more dovish stance, such as only two quarter-point rate rises this year, well before the Fed confirmed on Wednesday it had scaled back its forecast and left open its options over the timing of the next increase.

The central bank maintained a generally positive view of the US economy’s continued moderate expansion despite global risks that remained after recent improvements in markets. It expected inflation to stay low in the medium term.

Yellen told a press conference after the announcement on Wednesday that the decision would allow more time to verify that the US job market was continuing to strengthen despite risks from abroad. This is in line with its statutory objective of maximum employment. It is also the right decision for a global economy that is yet to gain the traction apparent in the US. Evidence of that is to be found in loosening policy by other central banks to offset weakening global growth, including negative interest rates in Japan and Europe, a big expansion of quantitative easing by the European Central Bank, and the People’s Bank of China’s cuts in rates and the banks’ reserve requirement ratio, unleashing more than 600 billion yuan (HK$713 billion) for lending. The decision is positive for China’s efforts to balance economic restructuring with development and maintain an annual GDP growth rate of at least 6.5 per cent, given that aggressive rate rises can trigger massive cross-border capital flows.

The slowing of the incremental rate-rise cycle is also good news for Hong Kong borrowers, because it is bound to result in banks raising their mortgage and other rates eventually. Longer term, far-reaching implications for our economy and property market may have been pushed back, but that is no reason for anyone to relax prudence in their financial dealings.