Home' Trinidad and Tobago Guardian : December 13th 2015 Contents DECEMBER 13 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
There was a time when a nudge
up or down in interest rates
was seen not only as normal,
but also as a testament to cen-
tral bankers ability to fine-
tune the economy. Not now.
The Federal Reserve is widely expected to
raise its benchmark interest rate, currently
close to zero, by a quarter of a percentage-
point on December 16. That would be its first
increase since June 2006.
Unfortunately the Fed s reasons for moving
this month reflect its fear of losing credibility
with the markets as much as its mastery of
Having talked endlessly about an imminent
move, the central bankers now feel bound to
keep their word. That is a poor rationale for
making monetary policy. One small, widely
heralded rate hike is unlikely to fell America s
economy. The important question is when the
next ones will follow. That is where the Fed
must now signal that it will be cautious.
Another hike in interest rates would not be
advisable yet. America s jobless rate, at five
per cent, is close to what economists consider
to be full employment, and there are tentative
signs that wage growth is finally picking up.
Since monetary policy operates with a lag,
central bankers must be forward-looking.
However, inflation in the price index for
personal-consumption expenditure, the Fed s
preferred measure, is only 0.2 per cent. The
core measure, which excludes food and energy
prices, is 1.3 per cent.
Although the headline rate will jump in the
coming months, as the sharp fall in energy
prices at the turn of 2014 drops out of the
annual rate, there is little sign that underlying
inflation is about to accelerate sharply or exceed
the two per cent target.
The risks of tightening too much too soon
still seem greater. Despite a combined stimulus
from zero interest rates and US$3.8 trillion of
asset purchases by the Fed, GDP in America
has risen at an annual average rate of around
two per cent since 2010.
The strong dollar and weakness in emerging
markets will weigh on America s economy and
the divergence between the Fed s tightening
and looser monetary policy elsewhere, espe-
cially in the euro area, Japan and China, means
that the dollar is likely to strengthen further.
Because its starting point is near-zero interest
rates, the Fed has more scope to deal with an
unexpected surge in inflation by shoving rates
upward than it has to address any threat of
recession by bringing them down again.
Even if the risks that the Fed faces are stub-
bornly lopsided, the consequences of one pre-
mature quarter-point rate hike are unlikely to
be disastrous. A series of premature increases
would be another matter, and that is where
the Fed s apparent plans are worrying. The
central bank s forecasts suggest that interest
rates will rise by a quarter-point roughly every
three months in 2016. Such a schedule of
increases would unsettle the bond markets,
which have priced in a slower pace of tight-
ening, and drive up the dollar yet further.
A rapid tightening cycle also would ratchet
up pressure abroad. There is a sense that many
emerging markets are in so deep a funk that
the Fed cannot make things much worse. Cap-
ital has flowed out of emerging-market shares
and bonds in four of the past five months,
according to the Institute of International
The currencies of commodity exporters,
hurt by China s waning appetite for raw mate-
rials, already have fallen.
However, sharply higher American interest
rates would put more pressure on countries
that rely on foreign capital to plug their trade
gaps. Central banks in Chile, Colombia, Peru
and South Africa recently have raised interest
rates in anticipation of the Fed, at some cost
to economic growth. The Fed s concern is the
American economy, of course, but sluggish
demand abroad and a strong dollar have effects
The recent experience of other central banks
offers salutary lessons in the dangers of moving
too fast to get off the interest-rate floor. In
2011 the European Central Bank twice raised
its main interest rate, but was forced to reverse
course swiftly and since then has cut even
more deeply. On December 3 it cut the rate
it pays on commercial-bank deposits to minus
0.3 per cent.
Interest rates in Sweden were increased from
0.25 per cent to 2.0 per cent before the Riks-
bank had to march them back down again,
and its main lending rate is now negative.
Central banks in Canada and Israel have suf-
fered similar reversals.
The Fed s apparent determination to get
going on monetary tightening is a worrying
signal of how fast it plans to move thereafter.
Before attempting a second hike, America s
central bank should give itself time to assess
the impact of the first.
@2015 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
The prospect of interest-rate
"lift-off" in America gives
investors a reason to take their
money there. Thus it has been
odd to see a procession of
emerging-market officials call
on the Fed to get on with it, the sooner the
better. Central bankers from India, Indonesia,
Malaysia, Mexico and Peru are among those
who have professed a desire for America s rates
One explanation is that they are a little like
donors waiting to give blood, tired of the excru-
ciating wait and hoping to be done with it.
Things certainly could get painful. As it is,
capital is already being diverted away from
developing countries and toward America. In
2010-2014 non-residents put US$22 billion
into emerging-market stocks and bonds every
month, on average. In November they moved
US$3.5 billion out, the fourth month of such
outflows in the past five, according to the Insti-
tute of International Finance, a trade associ-
Further, outflows in the coming months
would put more pressure on the beleaguered
currencies of many emerging markets. Depre-
ciation makes their hefty external debts even
more daunting. Dollar credit to non-banks
outside America reached US$9.8 trillion in the
middle of this year. A bit more than a third of
that was owed by borrowers in emerging mar-
kets, according to the Bank for International
Settlements, a forum for central bankers.
To defend their currencies, central banks
can raise interest rates in line with the Fed. In
recent weeks Chile, Colombia and Peru have
done exactly that in anticipation of lift-off, as
have Angola, Ghana, Zambia and others. Higher
domestic interest rates come at a cost, though,
dampening economic activity. They also make
it more expensive for companies to refinance
domestically, a problem because in recent years
the bulk of their new debt has been in their
local currencies. Whichever route emerging
markets choose to take, in other words, some
pain is inevitable---hence the desire to get it
over with quickly.
Another explanation for their sang-froid in
the face of the Fed is that the worst may already
be behind them. It has been a brutal year for
the assets and currencies of many developing
Average real exchange rates for emerging
markets, excluding China, are now as weak as
in late 2002, when investors still had raw mem-
ories of the crises of the 1990s.
A decade of furious growth had dimmed
those memories, but this year has revived them.
The MSCI index of emerging-market equities
has fallen by 15 per cent, badly underperforming
developed markets and hitting its lowest level
since the height of the financial crisis in 2008.
From this vantage, much of the downside
from rising American rates appears to have
been priced in already. Take two of the most
battered currencies, the Malaysian ringgit and
the Russian ruble. They are down by some 25
per cent and 50 per cent, respectively, during
the past two years. A steadying of their value
would make nominal corporate earnings in
both countries look far healthier in dollar terms:
Other things being equal, they would go from
double-digit falls to being flattish. Jonathan
Anderson of Emerging Advisors forecasts that
the big theme of 2016 will be a "stabilisation
trade," as portfolio investors are lured back to
The International Monetary Fund sees a
similar trajectory for economies as a whole. It
forecasts that emerging-market growth will
average 4.5 per cent next year, up from 3.9 per
cent this year, breaking a streak of five straight
years of decelerating growth. It is not that
emerging markets will have suddenly regained
their luster, but rather that recessions will be
less severe, if not over, in places such as Brazil
If the best that can be said about emerging
markets is that they will stabilise, however,
this points to a more troubling reason for their
relative indifference: the realisation that the
Fed is the least of their problems.
In 2013, investors dumped emerging-market
assets when America signaled the beginning
of the end of its program of quantitative easing.
That episode came to be known as the "taper
tantrum." This time the gloom that envelops
emerging markets might be more accurately
described as a "secular sulk."
The fear is that a golden era of growth, fueled
by China s ravenous appetite for commodities,
has come to a close, exposing deep cracks in
their economic foundations. David Lubin of
Citigroup talks of a "broken growth model."
Governments cannot stimulate their economies
because their creditors will not tolerate big
deficits. Companies also are unable or unwilling
to invest more because they have built up big
debts. Exports are of little help, because many
of these economies now are overly reliant on
The feeble state of manufacturing across
emerging markets, with the exception of parts
of Asia, means that many will miss out on the
one big upside to lift-off. The Fed is set to
raise rates because of America s relative eco-
nomic strength. America, in turn, should pro-
vide a boost to countries that make the things
it wants to buy. However, emerging markets
such as Indonesia and South Africa that spe-
cialise in commodities not only have been hit
hardest by China s slowdown, but also are the
least likely to benefit from America s growth.
To them "lift-off" will sound like a cruel joke.
They will stay pinned to the ground.
@2015 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
The Fed and monetary policy:
After lift-off, what?
The Fed puts the squeeze
on emerging markets
Links Archive December 12th 2015 December 14th 2015 Navigation Previous Page Next Page