Flip-flopping on rate hike

The US Federal Reserve building in Washington, DC. PHOTO: AFP

First it was hot, then it was cold.

Now it is hot again but no one is at all sure when it will happen.

Yesterday morning, the US Federal Reserve continued to keep the market and investors guessing on just when it will finally raise the benchmark US interest rate. But in a statement following its monthly policy meeting, the US Fed seemed to open the door to a hike in December - just the latest apparent change of tack by the Fed.

In the first half of this year, analysts were certain the Fed would raise rates this year, given falling US unemployment on the back of a strengthening economic recovery. Then last month, the Fed flagged concerns over "global economic and financial developments" - namely the slowdown in China and months of market volatility. This led many experts to believe that the worries over growth could delay a rate hike till early next year.

But in its latest statement, such references were completely removed, suggesting the Fed believes recent moves by the European and Chinese central banks were sufficient. The European Central Bank has hinted it could expand its stimulus programme to boost growth while China's central bank slashed interest rates for the sixth time this year last week.

Some markets celebrated the Fed's delay - the US S&P Index rose nearly 1.2 per cent after the Fed statement - but other analysts were more critical.

"The fluidity with which (Fed chief Janet) Yellen and the Federal Open Market Committee adopts and discards reasons for changing its monetary policy stance has heightened market uncertainty, and diminished the Fed's credibility," said Citigroup's chief US economist William Lee. The FOMC is the Fed's policymaking arm.

At some point, the Fed will have to raise the rates after years of near zero interest rates. But the flip-flopping and uncertainty in the run-up to when the trigger is finally pulled is not doing any favours to the market, investors and companies.

A version of this article appeared in the print edition of The Straits Times on October 30, 2015, with the headline 'Flip-flopping on rate hike'. Subscribe