Fed chair likely to hike rate in December
By Kim Jae-kyoung
The U.S. Federal Reserve is highly likely to lift its key rate this month for the first time in nearly a decade; but the normalizing process will remain very gradual, according to global economists.
A Korea Times survey of seven global economists show that there is a clear consensus that the U.S. will start raising its benchmark federal funds rate at the upcoming Federal Open Market Committee meeting slated for Dec. 15 and 16.
They all expect the Fed to raise its rate in December, followed by two or three more hikes in 2016. The Fed’s benchmark rate has been kept in the target range of zero to 0.25 percent since the 2008 financial crisis.
Those surveyed were Standard Chartered Bank Asia chief economist David Mann, HSBC Asian Economics Research co-head Fredric Neumann, Societe Generale economist Oh Suk-tae, Natixis Asia Pacific chief economist Alicia Garcia Herrero, independent economist Andy Xie, Wharton School Director Mauro Guillen, and Peterson Institute for International Economics Director Marcus Noland.
“I expect the Fed will raise its rate at the next meeting. Then the markets will focus on whether the Fed will take a pause or if this is the first of a series of stepped increases,” Noland said.
Mann echoed the view, saying, “We expect the U.S. to start the hiking cycle in December, but to end it by March 2016 at 0.75 percent for the Federal Funds Target Rate.”
In its latest report on the U.S. economic outlook for 2016, Standard Chartered said the U.S. economy is experiencing “zero-rate fatigue,” citing several reasons why the Fed will embark on policy normalization this month.
They are fears about fueling asset bubbles; a desire to regain monetary policy flexibility; the ability to cut rates later if needed; a feeling that monetary policy is not a panacea; and the genuine belief that inflation will start rising.
However, the economists were divided over how the hike will impact global markets.
Some expect the hike will have a limited impact because capital flight has already happened so the immediate effect will not be massive, while others argue that there will be significant capital flight from emerging markets.
“The impact on capital outflows from emerging markets, including Asia, is likely to be muted. Financial markets are already pricing in higher U.S. interest rates,” Neumann.
“Investors tend to anticipate moves by major central banks and this year's financial market volatility in many respects already reflects the expectation that U.S. rates will climb over the coming year,” he added.
He predicted that unless the Fed surprises on the upside and delivers even more hikes than are priced in, there shouldn't be a major impact on capital flows in emerging Asia.
“I don’t think that the first rate hike will be followed by a knee-jerk reaction in emerging markets such as a severe capital flight,” Oh said.
“Rather, I suspect that the steady capital outflow from those markets which started from taper tantrum in 2013 will continue into 2016 along with the gradual Fed tightening,” he added.
On the other hand, Guillen said that a rate increase will force more investors to leave emerging markets for the U.S.
“The effect will be felt throughout emerging markets, with short-term capital flows to the U.S. increasing suddenly as they chase higher returns,” he said. “ It will also lead to an appreciation of the dollar and a weakening of the euro.”