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What's All The Fuss About A Rate Hike?

Published 09/17/2015, 12:10 PM
Updated 03/09/2019, 08:30 AM

The Fuss about Fed’s Rate Hike

The United States Federal Reserve’s rate-hike prospects have sparked fears all over the world that a (more or less) quarter of a percent increase in interest rates will give rise to another 'Lehman' moment, leading the global economy to further instability. Given these worries, the Fed’s looming uncertainty and decision has been the talk of the town, receiving so much attention and concern in the recent months— some of which are already unnecessary and just a product of exaggerated panic and unwarranted judgments.

Fed’s Policy Meeting

With the many economic problems we are facing today, there have been a lot of varying opinions on the Fed’s rate hike. However, the speculations about the timing of the policy implementation is about to come to an end. Investors and analysts around the world are carefully on the watch for the two-day monetary policy meeting of the Federal Open Market Committee (FOMC) as a decision regarding the first rate hike in almost a decade is expected to finally be rendered. Once the American central bank carries it out, it will mark the beginning of the journey out of the long stretch of flat interest rates which has existed for a period longer than we originally expected, including past and present Fed policymakers. However, if we speak historically, it will rarely justify the heightened anxiety. Then may be so, we are actually gratuitously overreacting.

Fatal for the US Economy

Some investors worry that higher interest rates will not help ease the US economy and sustain its growth. They have this notion that a new policy will hurt “interest-rate sensitive” industries especially those in the housing and automobile sectors. However, with these sectors only playing a partial role in the condition of the entire economy, they can also hardly support the rate hike frenzy. The US government has recently released positive economic data, which indicate a healthy recovery. With the labor market, wages, banks, and industrial companies improving, we cannot deny that the American economy is getting back on track. Many corporations in the US that have termed out their debts still have substantial cash on their balance sheets. The US is still, on that note, undeniably upholding its mighty post in the global economy after all.

Worries over Other Nations

Leading economies like those in the European and Asian regions have been shaking the global economy for quite some time now. China and Japan, Asia’s economic giants, have been continuously slowing down with stock markets, currencies, exports, and other significant economic indicators crashing every now and then. Brazil and Russia, on the other hand, are already in the contraction territory as they have acknowledged increased volatility and likely destabilization.

Worries have it that the Fed might be raising rates too early, pushing the financial sectors around the world completely down the brink and posting threats for emerging countries. As true as it may be that imposing an increase in rates in the world’s top central bank will have some (undesired) effects on the world market, it is still the comprehensive policy moves and strategic measures of the respective economies that shall directly respond to their financial troubles. What we have to understand here is that we cannot solely depend on the Fed’s decision. We have other things to focus on. Each economy in the world has a role to play in thriving on and attracting growth. It is not the sole responsibility of the US to reverse the downward course we are seemingly headed to. Just because the US central bank’s decision to pursue its rate hike prospects for the first time in nine years will have some negative impact on other emerging and struggling economies does not mean that Fed officials need to hold it off. At the end of the day, it is still their own economy they are trying to work on.

Unhealthy Dependence on Central Banks

Financial markets have developed an undue reliance on central banks, notably unleashing them from the intrinsic nature of the economy. Being accustomed with flat interest rates and liquidity injections masked in a “volatility suppression” monetary system for years, investors have increased their confidence that they can harmlessly expand on ventures in aim for higher returns that come with a small rest for the obtained risks.

The fear: A sudden change in Fed’s interest rate policy, no matter how small it begins with, will prompt large capital outflows and portfolio reallocations, discouraging financial asset air pockets and worsening patchy liquidity.

Fed’s Mediocre Risk Management and Convincing Powers

The US central bank runs in an innately unpredictable environment that lacks historical precedent, facing a bizarre global fluidity. With all the lingering uncertainties, it is potentially in for a dive in its binary decision making: raising rates too early or not raising them early enough.

There have been so many questions and doubts and here is why: the Fed has poor convincing powers. The Fed and its officials have not persuaded the world market that the course of interest rate is much more important than the timing of its first increase in a decade. No matter when it begins, it will always take a dovish pace and irregular sequencing.

Many investors and analysts remain unsatisfied simply because the central bank has a difficulty in managing expectations. On its policy meeting, the Fed shall step up and focus on the entirety and scope of its rate hike outlook and divert people’s attention from the timing.

Let’s put an end to the hype. What we have to focus on is our contribution to growth and our readiness to come to the rescue once things take their turn for the worst.

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