Federal Reserve

New US Fed boss starts off from rare position of strength

Jay Powell has inherited an economy in decent shape but he will have to normalise rates while keeping growth on track

PUBLISHED : Sunday, 18 February, 2018, 3:25am
UPDATED : Sunday, 18 February, 2018, 3:25am

Former US Federal Reserve chairwoman Janet Yellen said on public television that she would have liked to serve a second term. That may be so, but as timing went, her departure was almost perfect.

Her successor Jay Powell’s first day in office was overshadowed by the protracted rout in the stock market. The S&P 500 and the Dow lost more than 4 per cent, making it the worst plunge since August 2015.

Yellen could walk out of the Fed headquarters with her head held high, having left behind an economy in a decent shape since the onset of the global financial crisis a decade ago.

Just days before her departure, she sounded almost prophetic when she warned that the stock and real estate markets in the United States had high valuations.

The US economy grew by 2.3 per cent last year, well ahead of the 1.5 per cent growth in 2016, but slower than 2015. For the first time in a decade, there is clear evidence of synchronised growth in all the major world economies.

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Powell has his work cut out for him. He will have to normalise interest rates after a prolonged period of ultra-low rates. He will have to shrink the Fed’s unprecedented US$4 trillion-plus balance sheet resulting from its quantitative easing and other unorthodox policies.

The trick is to do all that while keeping growth sustainable, unemployment low and inflation in check.

Some investors and pundits have blamed the recent stock rout on the Fed’s rate-raising programme.

But that has been so well telecast by Yellen and other Fed officials in the last two years that it is hard to see how that could be true.

The former Fed boss is probably right. Valuations are high and a significant correction is long overdue. So long as it does not drag on and pull down business and consumer confidence, it may even be a healthy pullback.

For Hong Kong people, the takeaway from Powell’s statement is that while rate rises lie ahead, any increase will be gradual. There is no doubt that the property market in Hong Kong is frothy.

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A return to more normal bank-lending rates should even be welcome, given our dubious distinction as having the world’s most expensive property market.

The unorthodox responses of many of the world’s major central banks, led by the Fed in the past decade, show professional economists like Yellen have learned the lesson of the Great Depression all too well.

Now, if the Fed can return policy to normal while keeping markets calm and the economy moving, it will help restore the credibility of the economic profession tarnished in the wake of the last global crisis.