Fed's China caution: Pretext or real concern

GMT 05:39 2015 Saturday ,19 September

Arab Today, arab today Fed's China caution: Pretext or real concern

The Federal Reserve's decision to delay raising interest rates
Washington - AFP

The Federal Reserve's decision to delay raising interest rates mainly because of uncertainties about China's economy is bothering a number of economists and investors.

Usually, the central bank is primarily focused on the US economy for setting the path of monetary policy, and rarely cites foreign developments to justify a rate decision.

"The Fed decided that all economic and financial issues in the world are its concern and given the uncertain global economic and financial conditions, the start of rate normalization would have to wait," said economist Joel Naroff.

The decision rattled Wall Street, driving both the S&P 500 and the Dow Jones Industrial Average down more than 1.6 percent Friday.

In its statement announcing the move Thursday, the Federal Open Market Committee, the Fed's policy arm, said that "recent global economic and financial developments  may restrain economic activity somewhat" and were likely to push down already tepid US inflation.
Although the FOMC statement did not explicitly name China, Fed Chair Janet Yellen mentioned the Asia giant in her news conference.

"A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States," she said.

Noting the financial markets turmoil after China unexpectedly devalued its currency in mid-August, Yellen said they in part "reflected concerns that there was downside risk to Chinese economic performance."

Nevertheless, she stressed, the Fed "should not be responding to the ups and downs" in markets and "it is certainly not our policy to do so," she said.

But "they did," said Chris Low of FTN Financial. "Why? Because apparently when the markets are in turmoil, it is 'incumbent on us' to speculate about the cause of the turbulence and in this case they decided it was weakness in foreign economies."
It seemed the Fed had enough data on the US economic front to merit a rate increase, said Ozlem Yaylaci, US economist at IHS Global Insight.
Yellen herself insisted that the "US economy that has been performing well."

For Derek Scissors, an economist at the American Enterprise Institute, Yellen's highlight on China's economic slowdown "is just giving an excuse to not raising rates."

The real reason for holding rates unchanged "is still weakness in the labor market," he said, noting that behind the encouraging fall in the unemployment rate to 5.1 percent, the labor force participation remains low and wages are stagnant.

The slowdown in China, the world's second-largest economy, however, is real. IHS Global Insight forecast that growth will fall from a 7.3 percent pace in 2014 to 6.5 percent this year and 6.3 percent in 2016.

"I wasn't surprised that the Fed leaned so heavily on international developments," said Stephen Oliner, a former Fed economist.

"They had to decide whether to tighten yesterday or wait a while, and the recent news about slowing global growth introduced a significant element of uncertainty in the outlook for the US," he told AFP.
Naroff raised concerns about the murkiness of the Chinese picture. "We don't even know what will constitute enough knowledge of what is happening in China, especially since the Chinese data are questionable, at best, and their policies are hardly transparent."

The International Monetary Fund called Beijing to task on that issue Thursday, urging it to improve the quality of its economic data.

There could be at least another reason, more troubling, that may have led the Fed to hold rates, suggested Scissors.

FOMC policymakers possibly don't trust the Chinese on currency policy, he said.

Perhaps they are saying to each other "we don't want to touch rates in a situation where we think that the Chinese might actually devalue suddenly their currency in a large way," he said.

Although Chinese President Xi Jinping is coming to Washington next week for a state visit with President Barack Obama, it is uncertain whether any Fed officials will be meeting with members of the Chinese delegation.

The Fed "wouldn't advertise that. It would probably scare people more than reassure them," Scissors said.

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