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Fed decision reflects global concerns

Updated: 2015-09-23 09:14

By Peter Liang(HK Edition)

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The decision by United States Federal Reserve to keep interest rates unchanged at last week's meeting has not brought any joy to investors. Many believe that the Fed's decision and chairwoman Janet Yellen's explanation for it have deepened concerns about the global economic problems - particularly the slowdown on the mainland.

The mainstream financial media in the US have criticized the Fed, arguing that a slight increase in interest rates at the time when the US economy is showing signs of sustainable recovery can actually help speed up the process. Quoting mainly bankers and their economists, these reports contended that raising rate now would actually encourage consumer spending in expectation of further increases in future.

According to a CNN report, David Kelly, chief global strategist at JPMorgan Funds, wrote in a note to clients that the Fed's inaction "may run entirely contrary to its own goals. By holding rates low, I believe the Fed is continuing to suppress economic growth and demand."

Kelly and some other economic analysts believe that the first few hikes of interest rates from extremely low levels could actually boost demand. They said that people thinking about buying a house could actually be encouraged to make a decision by a rate hike. It would be a signal that mortgage rates will not stay extremely low forever.

Bankers, of course, want interest rate to go up. Low interest rates in the past eight years or so have squeezed banks' profitability considerably. Most banks earn the bulk of their profits from the spread between the lending rate and the deposit rate. A low lending rate cuts into their profit margins because there is little room for deposit rates to go down at current levels.

Fed officials work closely, but not exclusively, with bankers. In making the decision not to raise rates, the Fed obviously took into consideration the impact of a rate hike on the weak global economy.

To be sure, the unemployment rate in the US has fallen to just above 5 percent. But sustained economic growth is far from assured. What is more, the inflation rate has remained at below 2 percent, which is not conducive to growth.

Before the Fed's latest meeting, the International Monetary Fund issued a statement explaining why raising interest rates now could have an adverse effect on the global economy. Since the Fed announced the ending of its quantitative easing program, there has been a sharp increase in the outflow of capital from emerging markets back to the US.

This outflow has triggered the depreciation of the currencies of many economies against the greenback. An increase in US interest rates could further fuel capital flight from economies which are particularly dependent on commodity exports. This could, in turn, add pressure on the price of oil and a range of other commodities, kicking off a global deflationary cycle.

In the view of most economists, the Fed did the right thing in holding off the rate hike at least for several months.

(HK Edition 09/23/2015 page7)

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