The Federal Reserve’s rate rise is the start of a return to normality
The low cost of borrowing in recent years has distorted property markets, including Hong Kong’s, so now is the time to adjust ourselves to the new reality
The US Federal Reserve has perfected the art of telegraphing rate rises to minimise market volatility. As expected, Fed chairwoman Janet Yellen yesterday raised short-term interest rates by 25 basis points to a range of 0.75 to 1.00 per cent. The announcement was not entirely free of surprises though. Some influential investors and analysts had expected a more aggressive pace of tightening, but the Fed said it would stick with a previous projection of no more than three rate increases this year. As a result, the US dollar, which has been strengthening against major currencies in the past month, immediately came under pressure.
For rate-sensitive Hong Kong, Yellen has brought a mixed message. Fewer rate rises are certainly welcome for mortgage holders and the property market in general. But the Fed chair said monetary policy has hit a turning point. This means rate rises would come more frequently than once a year, as experienced in 2015 and 2016. Increases in mortgage payments for Hong Kong homeowners have a way to go in coming years, given that borrowing rates have been at historical lows in the past 10 years. Those who wish to enter the property market, where prices have hit record highs, need to be especially cautious in the face of almost certain increases in interest payments. It remains to be seen whether the prices of flats in the city would moderate in a tightening environment.
Major stock markets, however, took heart from Yellen’s suggestion that the Fed’s policy outlook had not changed significantly since December and that it would not rush to judgment about the impact of possible tax cuts and increased fiscal spending by the Republican-led Congress. Looser fiscal policy emerging from Congress has led to speculation that the Fed would accelerate the pace of rate rises, but a majority of policymakers led by Yellen say robust economic data in the US enable them to take a wait-and-see approach to Congress’ promise of cutting taxes and loosening fiscal spending under stimulus policy advocated by the Donald Trump White House.
Yellen reassured the market by saying US employment and inflation data were approaching the Fed’s targets, and that perceived risks overseas had moderated. Though she didn’t name China, brighter mainland prospects had no doubt contributed to the Fed’s positive outlook. As the US starts its gradual rate normalisation, people should welcome the return of more reasonable borrowing rates. The ultra-low rates of the past decade have distorted prices in key asset classes and led to property bubbles in major cities around the world, including Hong Kong. Given our US dollar peg, it’s time we made the necessary adjustments to the new economic reality.