Mon, Dec 19, 2016 page6

• EDITORIAL: Monitoring results of Fed rate hike

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  The US central bank has finally shown sufficient courage to deliver another interest rate hike, a move that is likely to become the most important and final factor affecting the global economy and the world’s financial markets as the year draws to an end.

  While the US Federal Reserve’s announcement of an increase of 25 basis points in the federal funds rate on Wednesday had been anticipated by the markets, the US Federal Open Market Committee policymakers provided a surprise outlook for future rate hikes: They predicted three rate hikes next year — two had been expectated — and two more in 2018.

  Federal Reserve Chair Janet Yellen has justified last week’s hike — the first increase since December last year and only the second in a decade — by citing a lower unemployment rate, rising inflation and the potential impact of fiscal easing under a new administration in Washington.

  However, the key question remains whether the anticipated rate hike cycle in the US will lead other central banks to follow suit. If the answer is yes, then the world might discover that the era of cheap money is finally over.

  However, the world is unlikely to leave the era of low interest rates behind soon, as only central banks in Hong Kong, Mexico and Gulf states, such as Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates, raised their rates after the Fed’s action. Those in the UK, Switzerland, Norway, South Korea and Indonesia, among others, held their fire, signaling an underlying sense of caution about the prospects for the global economy next year.

  The potential trade conflict stemming from US president-elect Donald Trump’s anti-globalization rhetoric is not the only uncertainty. Central banks also need to stay vigilant and consider their best strategy in the face of the sluggish global recovery, upcoming elections in Europe, banking problems in the eurozone and the increasing unpredictability of political decisions in many parts of the world.

  Most importantly, monetary policymakers the world over are assessing the effects of a divergence from the US’ interest rate path on their national growth, productivity and capital allocation. They might be worried that if interest-rate spreads with the US continue to widen, then the appreciation of the US dollar would accelerate and disruptive volatility in currency movements would be unavoidable, further harming global economic and financial stability.

  For a small, export-reliant economy like Taiwan, excessive currency volatility is always bad news.

  Taiwan’s central bank is scheduled to hold a quarterly board meeting on Thursday. It kept its policy rates unchanged at its Sept. 29 meeting after cutting rates for four straight quarters since September last year.

  In view of the backdrop of rising external uncertainty — from increasing global trade tensions to the pace of the Fed’s tightening cycle, the bank might opt to stand pat again as domestic demand remains sluggish and domestic investment is still depressed, although exports have posted a tenuous recovery this year thus far. It might want to wait and see how much impact, if any, the Fed’s rate hike has on the global economy before changing its policy.

  Undoubtedly, the Fed’s rate hike shows that the US economic recovery is gathering speed and its outlook for more hikes could be interpreted as a relatively hawkish shift, driven mainly by assumptions of possible tax cuts and more infrastructure spending under a Trump administration.

  However, whether it would positively affect the global economy depends on the strength of the US’ growth momentum, the timing of a more expansionary fiscal policy and how its fiscal policy works to benefit the rest of the world, while offsetting the negative side effects of rising protectionism and the imposition of new trade barriers.
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