Some Asian economic officials worried at the last G-20 meeting of finance ministers and central bank governors (Cairns, Australia, September 20-21, 2014) that a widely expected monetary tightening in the United States would force them to follow suit and damage their own growth dynamics.
I am assuming that this was an earnest policy concern rather than the usual attempt to blame policy mistakes on the proverbial external shocks.
With that important clarification out of the way, I would like to calm these Asian fears with two arguments.
First, the Federal Reserve is nowhere close to any policy change that would force Asian countries into growth-stifling interest rate hikes. And whenever such changes begin to take place, they are likely to be gradual and largely within the range of policy-neutral real interest rates.
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Second, most of Asia's largest economies (China, Japan, India, South Korea and Indonesia) could cope with the normalization process of U.S. monetary policies with some adjustments to their macroeconomic conditions.
The Fed's party is still on
Provisional data for the first half of this month indicate that the Fed's balance sheet continues to grow after an $85.9 billion expansion in the course of August. That keeps the Fed's high-powered money advancing at an annual rate of 20 percent.
With these liquidity developments, it's easy to conclude that the Fed is not even thinking of moving the federal funds rate toward the upper range of its 0-0.25 percent target. Indeed, the effective fed funds rate was 0.08 percent at the close of trading last Friday -- exactly where it was a year ago.
The question is: Are the bond markets nervous about this because, normally, bond traders are the first to pass a vote of no confidence on Fed's policies?
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The answer is clear: The yield on the benchmark ten-year Treasury bond fell by nearly 10 basis points last week, despite a significant upward revision of America's economic growth in the second quarter of this year. Taking a longer view, that key Treasury's debt instrument was yielding last Friday exactly 50 basis points less than at the beginning of 2014.
You may call this the market history. That would be correct. But the Fed's present policy posture and, more importantly, the current long-term bond yields give us the glimpse into the U.S. economic outlook anticipated by the Fed and by the collective wisdom of bond market investors.
There is nothing here that Asia should worry about. On the contrary, the prospect of America's stronger and sustained growth and the rising dollar are good for Asian exports.
Thank the Fed and do the homework
Asia, therefore, has to look into the sustainability of its own macroeconomic balances.