Macroscope | ‘America first’ will guide the Fed’s monetary policy, despite emerging markets’ rate hike concerns

It might not be what some policymakers in Asia would like, but the US Federal Reserve will almost certainly raise US interest rates again on Wednesday and there is a material risk that a quarterly update to its “Summary of Economic Projections” will point to four hikes in 2018 rather than March’s projected three.

And this would be in addition to the US central bank’s continuing implementation of quantitative tightening and the greater issuance of government paper by the US Treasury as a consequence of the Trump administration’s fiscal policies.

Some policymakers in Asia would like the Fed to think about the wider consequences of its actions. “We know every country must decide their policy based on domestic circumstances but look, you have to take account of your actions and the impact of your actions to other countries, especially the emerging markets”, Perry Warjiyo, Indonesia’s central bank chief said last Wednesday, with the US central bank clearly in mind.

With the rupiah having struggled on foreign exchanges this year, Indonesia raised interest rates twice in May, to 4.75 per cent but, as Warjiyo’s comments attest, how the Fed moves is also critical to the Indonesian economy and its currency.

Elsewhere, India raised its benchmark repo rate by 25 basis points last Wednesday to 6.25 per cent. The Reserve Bank of India (RBI) was responding, as governor Urjit Patel said, “to the risks to [the] inflation target that have emerged in recent months”. Those risks would include a rise in energy prices and to a broader increase in imported inflationary pressures caused by Indian rupee weakness.