Fed up with the Fed

By Khairie Hisyam

Every few months we ask ourselves the same question: will the Fed raise rates? So far, the answer has been no, but even if it did, we’d just ask if the Fed will raise rates further.

Do you care about whether the US Federal Reserve (Fed) will finally raise interest rates for the first time in a decade next month? We should – although the said interest rates are essentially for the US, the ripple effects of a rise would reach our shores.

Stateside, a rise would be a big thing for them. Depending on the quantum, domestic banks may see earnings rise though this also depends on the pace of subsequent hikes. Variable interest rates on credit cards and mortgages, say, would rise slightly, causing consumers to pay more finance charges.

That’s not to say other countries aren’t affected too. The US dollar has been strengthening of late, while a number of currencies, including our ringgit, weakened. If higher interest rates in the US come into the picture, then the combination of both may depress the ringgit and other emerging market currencies further.

And then there is also the flow of money to think about: a Fed rate hike would probably push yields up stateside. This in turn reduces the attractiveness of emerging markets, where hot money from three rounds of quantitative easing by the Fed has been chasing higher returns for a few years, causing bulls to run and what-have-yous.

In other words, countries with volatile financial markets will be watching closely on any Fed decision the next time it meets in December. A rate hike will mean money flowing out of their markets and back into the US with all the implications that entails.

Alan Greenspan

So it’s a pretty big deal for everyone outside of the US, too. A hike will signal the end of a low interest rates era that had begun with Alan Greenspan more than a decade ago when he decided that interest rates should be at 1% after the tech bubble popped and a mild recession hit the US.

But the suspense is getting tired now. The wide-reaching impact of the Fed’s first rate hike in a decade means everyone of note is holding their breaths – as one UK banker told the Financial Times in September, few countries want to stand out against their peers by raising interest rates when the US isn’t doing so because what happens then is that your currency appreciates while others don’t and trade takes a hit and so on.

So there is a lot of uncertainty hanging in the air as we await for one particular outcome from the Fed, which has not materialised quarter after quarter.

That sort of environment is difficult for businesses and investors. Can you imagine planning your strategy for the next few years with an albatross hanging around your neck on whether the Fed will or will not increase interest rates, by how much and when, and how you’ll have to adjust your portfolio and investments every time something like that happens?

Most people would probably factor in the worst-case scenario so they can sleep better at night. Beats waking up with cold sweat every time your phone vibrates with the latest news on a potential Fed decision, isn’t it?

Janet Yellen

To be fair, the Fed has its reasons to wait for the right time to increase rates. Fed chair Janet Yellen and her team has to think about inflation figures, wage growth and employment among other things and how a hike impacts those figures for the US.

But the continuous postponement of the decision means much of the financial world is living in a state of three-month limbo, tiding over until the next round of speculative will-they-or-won’t-they commentaries and guessing whether the Fed will this time or why they won’t this time.

And a number of critics have argued that while the eventual hike may not be pleasant – indeed, will any interest rate hike ever be pleasant? – the US economy is strong enough to take it in its stride. Even our own central banking chief Zeti Akhtar Aziz has opined that the Fed may do well to just get it over and done with soon.

When trying to time the increase is so counter-productive, might as well bite the bullet and go ahead anyway. It’ll hurt, but at least we’ll know precisely how much panadol to swallow.

GRRRRR!!!