The Straits Times says

Inching towards uncertain times

The US Federal Reserve's decision to nudge up the key interest rate by a quarter-percentage point ends an era of unprecedented cheap money that was put in place to tackle the global financial crisis, which was sparked by the bursting of the housing bubble and which spread through the US system to emerge as the worst crisis since the 1930s Depression, and thereafter roiled every Western market. Intimated months ago, the rate hike is a cautious endorsement of the health of the world's largest economy, which has emerged from its stupor to expand steadily, even if not spectacularly. As the recovery progresses, the Fed has signalled that it intends to lift rates by a quarter-percentage point every three months until next December. President Barack Obama, who assumed office when the crisis was at its most severe, can look back with satisfaction that he is bequeathing a robust enough economy to his successor, unlike the situation he inherited.

The rate increase is appropriate to US circumstances. The employment situation there is healthy, although some would like to see wages improving, and more people who despairingly left the job market, returning. The housing market has gained colour in its cheeks. Indeed, some, like the investment pundit Marc Faber, think the Fed should have acted sooner. That it did not do so was partly because of fear of the impact it would have on global markets. The months of advance notice it provided were thus necessary.

Asian markets have, on the whole, responded positively to the development. Who cannot but cheer the assurances that the market of last resort is in good health! Still, Asia will doubtless endure some capital flight as funds seek a safer haven that has started to offer better yields. This will have an impact on asset prices here.

Also, when funds were cheap, many companies racked up large amounts of dollar debt. American banks, flush with funds and looking for better returns abroad, even encouraged the phenomenon. Now, as the greenback strengthens, those loans will become less easy to repay. Emerging market debt purchased in dollars exceeds US$3.4 trillion (S$4.8 trillion). A good part of it is here. Besides, the Asian economy is not looking healthy. Exports are slumping all round, leading to fear of competitive devaluations. China, even after a series of rate cuts, is expanding at its slowest in a quarter-century. Japan, where the pedal has been pressed to the floor for a long time, is running out of ideas to rev up its economy. India, less affected by the crisis and buoyed by cheap oil imports, is underperforming its potential nevertheless. Central banks in the region need to watch the situation and coordinate closely with finance ministries. They should also have a deep conversation with banks and other financial institutions with large exposure to real estate, commodities trading, and oil and gas.

A version of this article appeared in the print edition of The Straits Times on December 19, 2015, with the headline 'Inching towards uncertain times'. Print Edition | Subscribe