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Federal Reserve

Cautious US interest rate policy welcome at time of tensions

The approach of Fed chief Jerome Powell will leave room for reversing course and help mitigate adverse fallout from trade blows by Beijing and Washington

PUBLISHED : Tuesday, 27 March, 2018, 1:45am
UPDATED : Tuesday, 03 July, 2018, 9:47pm

As expected, the new Federal Reserve chairman Jerome Powell has raised the benchmark interest rate by a quarter of a percentage point to a range of 1.5 per cent to 1.75 per cent. This marks the Fed’s sixth rate increase since the onset of the global financial crisis a decade ago. As the move was well advertised in advance, observers are more interested in Powell’s generally encouraging US economic outlook, which sees both growth and consumer confidence strengthening.

Those in Hong Kong will no doubt take such Fed forecasts as indicative of an accelerated pace of rising interest rates, with its direct effects on local borrowing costs and the real estate market. Having enjoyed ample liquidity, the city’s lenders have not had to track every Fed move in the past few years. But with quickening US increases they will have no choice but to follow going forward, thanks to the US dollar peg.

Hong Kong’s monetary authority raises lending rate to 2 per cent to defend peg, raise mortgages

Higher borrowing costs should be welcome by the public and the administration under Chief Executive Carrie Lam Cheng Yuet-ngor, as home unaffordability has become a major source of social discontent. No one wants an adverse rate environment that could bring down the property market, but a steadily rising one to slow down rising prices can be beneficial. Since 2003, the city’s home prices have soared 430 per cent, making us the world’s second most expensive property market after tax haven Monaco.

The US Fed expects the domestic jobless rate to fall to 3.8 per cent this year and 3.6 per cent in 2019. It also anticipates a short-term stimulus from the US Congress in the form of a US$1.5 trillion tax cut and increased federal spending as promised by the White House.

Powell is likely to follow his predecessor Janet Yellen in pursuing a path of slow and steady rate increases. That will help Hong Kong adjust to the new rate environment after a decade of abnormally low interest rates.

How interest rates and central bank tea leaves will determine the financial weather forecast for 2018

Not everything is plain sailing, though. The aggressive trade policy of US President Donald Trump has become a gathering cloud. He has already imposed tariffs on imported steel and aluminium, a move primarily aimed at China though without naming it, and has announced sweeping tariffs and investment restrictions on up to US$60 billion in Chinese imports. Hong Kong’s open economy and its reliance on exports and re-exports would be hard hit in the event of a trade war. Beijing desperately wants to avoid open conflict and has been forced to retaliate by imposing new tariffs on almost US$3 billion worth of US products.

Powell’s cautious rates policy will leave room for reversing course and help mitigate any adverse fallout should the two sides come to blows.