The big gamble not to follow the Fed


Limited ability: Lowe says his peers have limited ability to cushion the global economy.

Don’t expect Asia to take many leads from Federal Reserve Chairman Jerome Powell’s signal that further US interest rate cuts are coming.

That’s not because the Fed chief’s comments last Friday at Jackson Hole weren’t clear, but because Asia is already well on its way toward significant relaxing of monetary policy. India, Malaysia, the Philippines, Australia, Indonesia and South Korea cut rates before the Fed’s move lower in July. China pumped money into its economy throughout 2018, even as American policymakers were increasing rates.

To many observers, this could appear like a gutsy bet. Emerging-market central banks tend to follow the Fed, fearful that diverging too sharply from US monetary policy will weaken their currencies and trigger market volatility.

Yet the US, once a bastion of economic transparency with sound institutions, is now a major source of upheaval. Asian policymakers are willing to gamble that any harm from acting too slowly to fight a trade slowdown will far outweigh the risks of a sell-off.

Central banks can’t make trade conflict go away, nor can they fully mitigate the hit to confidence from President Donald Trump’s fusillades against trading partners, be they allies or rivals. His efforts to undermine the Fed itself were on full display Friday within minutes of Powell’s speech. The only sure thing these days seems to be continued chaos from Washington - and if that’s the case, better carry on with rate cuts because underlying conditions warrant it. The International Monetary Fund last month trimmed its forecasts for global growth this year, citing trade travails.

Reserve Bank of Australia (RBA) governor Philip Lowe rightly called out turgid politics in the closing session at Jackson Hole and said his peers had limited ability to cushion the global economy.

That’s been true for a while, and didn’t stop the RBA lowering rates twice this year and entertaining the prospect of less conventional responses.

To others, the latest turmoil surrounding the Fed merely accelerates a welcome transition from dollar dominance. Bank of England governor Mark Carney used his perch at Jackson Hole to push his idea for a digital currency that would eventually replace the greenback in international transactions. The shift to a less US-centric world was never going to be free of thrills and spills.

Carney’s idea may seem far-fetched now - the US bond market remains a global benchmark given its sheer size and liquidity. But the Fed’s diminished sway could give rise to a monetary-policy compass closer to home.

China is today the dominant economic power in Asia, and its influence is growing. While the Fed’s decision to pause rate hikes in January cleared the path for Asian central bankers to ease, China’s slowdown, exacerbated by the trade conflict, has become an equally important consideration.

Asian central banks are now charting more of their own course, still influenced by the Fed, though less dependent on it for direction. That’s appropriate, yet not without dangers. Beijing hasn’t shown the same desire as the US for global standard-setting. Its policymakers worry about China, first and foremost.

It’s safe to say China’s financial and economic influence won’t get smaller. America’s already has. The rest of Asia must decide which central bank matters more. Some have already voted. — Bloomberg


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