The Yomiuri Shimbun
Given increased uncertainties in the world economy, U.S. monetary policy faces a difficult phase. Greater flexibility in policy steering is needed to sustain business expansion.
The U.S. Federal Reserve Board has unanimously decided to raise its key interest rate for the fourth time this year.
The U.S. economy has been growing firmly at an annual rate in the mid-3 percent level. The inflation rate has persisted at about 2 percent, as targeted by the Fed, while the unemployment rate has dropped to a historically low level last seen about 50 years ago.
It is understandable that the Federal Reserve has decided on an additional interest rate increase with a view to forestalling the overheating of business and inflation.
As for the forecast of the pace of rate hikes in 2019, which was a focal point, the Fed has decided to reduce it to twice a year from the previous three times a year.
Since late last year, the Fed has implemented a rate increase mechanically in almost every quarter. It can be said that U.S. monetary policy is approaching a turning point.
A major factor behind the forecast of a slower pace of rate hikes is increased concern about the slowdown of the U.S. economy.
Investment and production are feared to slacken next year due to the intensification of trade frictions and the slowdown of China’s economic growth. The effects of large-scale tax cuts are anticipated to wear off in the latter half of next year.
It stands to reason that the Fed has shifted to a prudent stance toward rate hikes after becoming more wary of such risks.
U.S. rate increases will spark capital outflows from emerging economies into the United States. This year saw Argentina and Turkey, whose economic foundations are weak, suffer radical declines in the value of their currencies.
Keep close watch
Drastic drops in currency values will bring about risks of serious price hikes and business slowdowns in emerging economies. If the pace of U.S. interest rate hikes is decreased as planned by the Fed, it will be able to help alleviate the anxieties of emerging economies.
A matter of concern is that it will become difficult to forecast the Fed’s next monetary policy if rates are not increased mechanically.
Stock prices on U.S. markets plunged Wednesday to a record low for this year following the Fed’s rate hike decision. One reason for this could be a market perception that the Fed is still positive about rate raises although it has forecast a slower pace.
Care must be taken about the possibility of markets becoming unstable due to various speculations over ulterior motives of the Fed.
It is worrying that U.S. President Donald Trump has repeated his criticism of the Fed in his tweets and through other means.
The Fed must take all possible steps to ensure a closer-than-before interactive approach with the market. It is essential for the central bank to make its policy direction sufficiently permeate the market.
If the U.S. pace of raising interest rates slows down, it will become difficult for the interest-rate difference to widen between Japan and the United States. Possibilities may increase of foreign exchange markets swinging to a stronger yen. The government and the Bank of Japan should pay closer attention to the future policy management of the U.S. Federal Reserve.
(From The Yomiuri Shimbun, Dec. 21, 2018)