as US finds it difficult to raise interest rates
Noticeable slowdown in the United States job market and new turbulence in financial markets caused by the Brexit referendum within the United Kingdom make it far more difficult for the US Federal Reserve (Fed) to raise interest rates. However, this does not help to stabilise the stock and foreign exchange (forex) markets, but instead further inflames investors' suspicion about growing downward pressure on the US economy. So much so that the sentiments in global financial markets become even more panicky. With the US, EU and Japanese stock markets carrying on the down-trend, Hong Kong's Hang Seng Index shed over 400 points yesterday to close barely above 20,000.
Global financial markets are in a state of extreme nervousness recently. The EU referendum in the United Kingdom is eminent, with the Eurosceptics steadily taking the lead in popularity polls. As a result, risk aversion sentiment prevails, and risk assets are being dumped while gold and sovereign bonds becoming safe-haven assets. In fact, funds have been rushing like a swarm of bees to buy in sovereign bonds, so much so that sovereign bonds with negative yield now are worth over US$10 trillion in total. From this it can be seen how panicky the markets are.
The US Fed left its benchmark interest rate unchanged after the Wednesday meeting. But its statement after the meeting sounded dovish, suggesting that the US economy is under certain downward pressure. Fed Chair Janet Yellen talked more candidly that the Brexit referendum next week was one important factor in the consideration to keep interest rate unchanged. After all, the Fed has to come down to earth, as its monetary policy orientation is increasingly affected by global factors.
The fundamentals of the world economy are not sound, and the US economy cannot but be affected. Whatever the result of the Brexit referendum within the United Kingdom, it inevitably will affect global economy and financial markets, and the US economy as well. The Fed statement after its meeting, which declared in no uncertain terms that the pace of improvement in the labor market has slowed and enterprise investment remained weak, indicates its view on US economic outlook becomes more cautious and delivers a dovish signal to the markets. This is meant the pace of interest rate hikes will become slower than expected. The US is expected to make only one increase of its benchmark interest rate within this year.
More importantly, the Fed has lowered its economic growth forecasts for this year to 2% from 2.2%, suggesting the risk for US economic downturn is on the rise and it is difficult for the Fed to increase interest rate within this year. Even though Fed Chair Janet Yellen still insisted that there was a chance for interest rate increase in July, the markets have cast their vote of non-confidence. Latest interest rate futures show the probability for US to increase its interest rate within this year drops to smaller than 50%. And the US dollars devalued against major currencies. The Japanese yen's exchange rate against the greenback sharply jumped to its high in nearly two years, once reaching to the rate of 103 yen to a US dollar. With a lot of short-covering buy-ins, Japanese yen seems to keep on going up, endangering the Japanese economy.
That the US economy is weakening is seen by everyone: nonfarm payroll employment declines, quarterly performance of enterprises is poor, and economic growth is the slowest in a year. It is possible that the US may not only have to turn around to cut interest rates but also be forced to re-launch quantitative easing (QE) monetary measures. What deserves attention is that Fed Chair Janet Yellen dropped a hint yesterday that the Fed might legitimately consider "using helicopter money" in an all-out effort to rescue the US economy from a severe downturn. The implication is that the Fed is already prepared to cope with the risk of an economic hard landing. The so-called "helicopter money" is mainly meant to increase government spending through dramatic tax cuts and printing a large quantity of money so as to stimulate economic growth.
Some big Wall Street investment bank now forecasts that the probability for US economy to fall into recession in three years' time reaches 60%, and eventually the Fed may have to come to rescue with fiscal QE measures similar to dropping "helicopter money".
The Fed does not rule out a review of the pace of interest rate normalisation. This is evident that the US economy and even the world economy face more uncertainties. The risk for some sudden changes in global financial markets become higher and higher. 17 June 2017
