The US Federal Reserve’s decision to delay raising interest rates mainly because of uncertainties about China’s economy is bothering a number of economists and investors.
Usually, the central bank is primarily focused on the US economy for setting the path of monetary policy, and rarely cites foreign developments to justify a rate decision.
“The Fed decided that all economic and financial issues in the world are its concern and given the uncertain global economic and financial conditions, the start of rate normalization would have to wait,” Naroff Economic Advisors chief economist Joel Naroff said.
The decision rattled Wall Street, driving both the S&P 500 and the Dow Jones Industrial Average down more than 1.6 percent on Friday.
In its statement announcing the move on Thursday, the Federal Open Market Committee (FOMC), the Fed’s policy arm, said that “recent global economic and financial developments might restrain economic activity somewhat” and were likely to push down already tepid US inflation.
Although the FOMC statement did not explicitly name China, Fed Chair Janet Yellen mentioned the Asian giant in her news conference.
“A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they might spill over to the US,” she said.
Citing the financial markets turmoil after China unexpectedly devalued its currency in the middle of last month, Yellen said they in part “reflected concerns that there was downside risk to Chinese economic performance.”
Nevertheless, the Fed “should not be responding to the ups and downs” in markets and “it is certainly not our policy to do so,” she said.
However, “they did,” Chris Low of FTN Financial said.
“Why? Because apparently when the markets are in turmoil, it is ‘incumbent on us’ to speculate about the cause of the turbulence and in this case they decided it was weakness in foreign economies,” Low said.
It seemed the Fed had enough data on the US economic front to merit a rate increase, IHS Global Insight US economist Ozlem Yaylaci said.
For American Enterprise Institute economist Derek Scissors, Yellen’s highlight on China’s economic slowdown “is just giving an excuse for not raising rates.”
The real reason for holding rates unchanged “is still weakness in the labor market,” he said, adding that behind the encouraging fall in the unemployment rate to 5.1 percent, the labor force participation remains low and wages are stagnant.
However, the slowdown in China, the world’s second-largest economy, is real.
IHS Global Insight forecast that growth will fall from 7.3 percent last year to 6.5 percent this year and 6.3 percent next year.
“I wasn’t surprised that the Fed leaned so heavily on international developments,” former Fed economist Stephen Oliner said. “They had to decide whether to tighten yesterday or wait a while, and the recent news about slowing global growth introduced a significant element of uncertainty in the outlook for the US.”
Naroff raised concerns about the murkiness of the Chinese picture.
“We don’t even know what will constitute enough knowledge of what is happening in China, especially since the Chinese data are questionable, at best, and their policies are hardly transparent,” Naroff said.
Scissors said there could be at least another reason, more troubling, that might have led the Fed to hold rates.
“FOMC policymakers possibly do not trust the Chinese on currency policy,” Scissors said. “Perhaps they are saying to each other: We don’t want to touch rates in a situation where we think that the Chinese might actually suddenly devalue their currency in a large way.”
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