The United States is steadily finishing up with its ultra-easy monetary policy. The increase in U.S. interest rates has reached a stage requiring even closer attention to determine the possible ramifications for global money movements.
The U.S. Federal Reserve Board has decided to raise interest rates for the first time in three months. This is the sixth increase since December 2015, when the Fed dropped a policy that had effectively kept interest rates at 0 percent. Its policy rate will increase to a range of 1.50 percent to 1.75 percent.
The U.S. economy is on solid footing and the unemployment rate of 4.1 percent is the lowest level in about 17 years. The Fed forecast the real economic growth rate for 2018 to be 2.7 percent, raising its prediction from December 2017.
Some market observers thought the Fed might increase the pace of its interest rate hikes, but its latest decision left unchanged the forecast that rates would be nudged up three times this year.
It can be said that Fed Chair Jerome Powell, who took over the position in February, displayed the sort of consistency expected from someone promoted internally from the Fed's Board of Governors.
It will not be easy to normalize the long-term, massive-scale monetary easing policies adopted by advanced nations during the financial crisis after Lehman Brothers collapsed in 2008. One major concern is that capital could suddenly be withdrawn from emerging economies.
Markets in emerging economies have soaked up huge volumes of funds generated by monetary easing. As U.S. interest rates rise, the tendency of foreign capital to exit these markets is already strengthening. Some nations have been forced to hike their policy interest rates to protect their own national currency.
The Fed's lineup under Powell needs to assess global money movements even more scrupulously than before, and carefully steer financial policy.
Trump protectionism a worry
U.S. President Donald Trump's protectionist policies also present risks in the foreseeable future.
Trump has shown he will not hesitate to unilaterally implement import restriction measures as he advocates securing jobs in domestic industries. If trade friction between the United States and other nations intensifies, investors could become more cautious, stock prices could fall and the exodus of capital from emerging economies could accelerate.
The rising U.S. interest rates impact Japan. One such way is the widening gap between rates in the United States and Japan, where the Bank of Japan is continuing a negative interest rate policy. This could become a risk that causes instability in exchange rates and elsewhere.
The Bank of Japan has also just added new faces to its lineup, with the replacement of two deputy governors. Top officials at both central banks should closely communicate and build relations that contribute to smooth policy management of each bank.
A common problem Japan and the United States face is the reality that prices and wages have not increased in line with economic and employment growth.
Both nations have set an annual inflation target of 2 percent. Both have yet to achieve this goal, but there is a striking difference in the approaches taken by Japan's central bank and the Fed, which has steadily lifted interest rates.
The Fed's method, which has commenced the normalization of monetary policy without causing major turmoil, should give the Bank of Japan food for thought.
(From The Yomiuri Shimbun, March 23, 2018)
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