Can the United States, which pulls the global economy along, maintain its robust economic growth? U.S. financial authorities should continue their policy management with even greater care.
The U.S. Federal Reserve Board held a meeting of its Federal Open Market Committee (FOMC), which decided to raise a key interest rate for the third time this year.
Due to the effects of major tax cuts and other factors, the U.S. economy is chalking up a high growth rate in the 4 percent range. The inflation rate has reached the Fed's target of 2 percent and the unemployment rate is at a historically low level.
The Fed's decision to go ahead with an additional interest rate hike is reasonable from the perspective of preventing excessive inflation and the economy from overheating.
The federal funds rate has been lifted above 2 percent, returning to this level for the first time since the financial crisis triggered by the so-called Lehman Shock about 10 years ago. The normalization of U.S. financial policy is steadily moving forward, and lifting this interest rate can be said to indicate again the strength of the U.S. economy.
The FOMC forecasts the economy will continue to expand and expects the key rate will be hiked once more this year and three times in 2019.
However, financial policies will require caution hereafter. The first thing to be on guard against is the risk that the U.S. interest rate hikes could spur capital outflows from emerging economies.
Countries such as Argentina and Turkey, which have fragile economic foundations, have already seen the value of their currencies sharply depreciate. If U.S. interest rate hikes continue, investment capital from around the world could end up being further diverted to U.S. dollar assets, where it could expect to rake in profits from the high interest rates.
BOJ must stay vigilant
Sudden currency depreciations could trigger economic slowdowns and commodity prices to skyrocket in emerging economies. It is vital that the Fed gives additional consideration to the side effects its policy decisions can have on emerging economies.
It also will be essential to properly maintain "dialogue with the market" and thoroughly weave this into the financial policy's overall direction.
The trade policy of the administration of U.S. President Donald Trump also is a cause for concern. The United States has slapped tariffs on goods imported from China worth 250 billion dollars (about 28 trillion yen).
If these sanctions stay in place for an extended time, rising prices and other impacts stemming from the higher tariffs will significantly increase the financial burden shouldered by U.S. consumers and companies, raising fears that downward pressure could squeeze the U.S. economy.
It will become important for the Fed to accurately analyze the negative impacts the administration's protectionist policies will have on the U.S. economy.
If U.S. rate hikes continue to widen the gap between rates in Japan and the United States, it will become easier for the yen to depreciate against the dollar. While this could be expected to produce the benefit of boosting exports from Japan, concerns have been raised that the price of imported goods such as crude oil would jump, weighing on companies and family budgets.
The FOMC suggested the possibility that interest rate hikes could be halted in 2020. In the future, when markets start to factor in the end of interest rate increases, the yen could conversely strengthen against the dollar.
The Bank of Japan must keep an even closer watch on how the Fed is steering the U.S. economy.
(From The Yomiuri Shimbun, Sept. 30, 2018)
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