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Editorial: After interest rate hike, Fed must keep an eye on uncertain global economy

  • June 15, 2018
  • , The Japan News , 08:46 p.m.
  • English Press

There is growing uncertainty about the future of the global economy. The U.S. Federal Reserve Board, whose actions wield considerable influence over global markets, is required to steer its monetary policies with flexibility and agility.

 

The Fed has decided to raise interest rates for the second time this year. The U.S. unemployment rate has fallen to the lowest level in about 18 years, and the inflation rate has reached its 2 percent target.

 

The U.S. economy has been continuing solid growth, and by looking at the domestic situation alone, the decision to raise interest rates was appropriate.

 

The Fed is expected to make two additional rate hikes by the end of this year as it has changed its earlier indication on rate hikes for the year from three times to four times.

 

The U.S. central bank seems to be judging that big tax cuts, increased spending and other policies taken by the administration of President Donald Trump would give the economy a further considerable lift.

 

What should be kept in mind is that the Fed’s policy management has a huge impact on international capital flows.

 

In February, just after speculation spread through the markets that the pace of rate increases would accelerate, U.S. interest rates jumped and stock prices around the world fell.

Successive interest rate hikes since December 2015 have resulted in huge sums of investment capital pouring into the United States from emerging economies.

 

Nations with economic anxiety, including Argentina and Turkey, have been struck by plunges in the value of their currencies.

 

There are concerns the tumbling value of these currencies could lead to severe price increases and an economic downturn. Vigilance is needed against the risk of volatility in emerging economies shaking the global economy, as happened during the Asian currency crisis in the past.

 

Keep ‘dialogue with markets’

 

The Fed must carefully continue its “dialogue with the markets.” As well as accurately grasping the actual state of the economy, the central bank should thoroughly ensure its monetary policy direction is well-understood by the markets.

 

There is also a risk that trade and investment could stagnate through the scenario that the Trump administration’s protectionist policies get even more antagonistic.

 

How to deal with the negative impacts brought about by trade friction will be a matter that needs to be addressed.

 

The unstable political and economic situation in Europe also cannot be overlooked.

 

In May, political turmoil in Italy and other factors caused government bonds in southern Europe to be sold off, rattling financial markets.

 

On Thursday, the European Central Bank decided to end its quantitative easing program, which included buying government bonds, by the end of this year.

 

With the end of this program in mind, it possibly will become easier for government bond prices to dive and for the euro to strengthen against other currencies on the markets.

 

It is important to prevent a crisis from originating in Europe. The Fed and European monetary authorities must work more closely together and closely monitor the markets.

 

The latest hike in U.S. interest rates has widened the gap with Japan, which has adopted a negative interest rate policy, causing concerns that this could generate instability in exchange rates. The Bank of Japan must attentively watch the steps taken by the Fed.

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