24 October 2016
The US remained strong against the euro and the Japanese yen. Photo: Bloomberg
The US remained strong against the euro and the Japanese yen. Photo: Bloomberg

Now is the best time for the Fed to raise rates

The US Federal Reserve suggested that interest rates will be kept at the present level at the moment, but most investors believe the “liftoff” will happen in the first quarter of next year.

This week, global capital markets, especially the stock markets, saw notable increases. The United States’ NASDAQ and Hong Kong’s Hang Seng Index both rebounded strongly and the uptrend was also seen in emerging markets like Brazil. Crude oil price also reached US$50 per barrel.

Funds are flowing into financial assets, instead of the real economy. However, the financial results of banks in different countries show declining profits and rising bad loans, prompting them to resort to layoffs and other cost-saving measures.

Most analysts believe Japan and the European Central Bank will enlarge the scale of their quantitative easing (QE) schemes by the end of the year but the US wouldn’t raise rates in December.

I don’t think so. There’s no less than 10 percent possibility that the Fed rate hike will come in December.

I definitely don’t believe the Fed relies only economic data to set the interest rate after seven years of  “near zero” interest rates. The Fed is like a trader. It cherishes its reputation and hopes that every move it takes will be influential.

The downturn is going to continue and worsen in the first quarter of next year. As the US presidential election campaign will start in the second half of 2016, the window to increase interest rates falls in the seven months to June 2016.

If the Fed waits until the first half of next year to hike rates, even if only once, the situation will only worsen.

It’s better to do it now when global stock markets are rebounding, and US stock indexes are at a historical high.

In addition, if the rate hike comes in December, it can help the European and Japanese central banks, indirectly, to devaluate their currencies as part of their QE measures.

Gold’s price was down to US$1,125 per ounce, while the euro fell to 1.10 against the greenback and the yen was at 121 against the dollar this week.

The yield for 10-year Treasury bonds rose to 2.2 percent or higher.

The clues seem all around. The rise of the stock market index suggests that the sword of Damocles will finally be dismissed.

This article appeared in the Hong Kong Economic Journal on Nov. 5.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank

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