The Yomiuri ShimbunIt is essential for the U.S. Federal Reserve Board to steer policy measures flexibly to ensure sustainable growth and market stability.

The Fed has decided to put interest rate hikes on hold in 2019. The decision changed its outlook for the number of rate hikes this year, from two to zero.

The U.S. central bank also intends to halt the reduction of its holdings of U.S. Treasury bonds and other assets at the end of September.

Earlier this month, the European Central Bank announced it would abandon plans to increase rates this year. This means that monetary policies in the United States and Europe have reached turning points together.

Due to factors such as economic slowdowns in China and Europe and trade friction between the United States and China, concerns have grown over a possible downturn in the global economy.

Rate hikes and shrinkage of central bank asset holdings reduce the amount of money in circulation and cool the economy. Amid growing uncertainty for economic prospects, it appears to be a reasonable decision for the Fed to modify its credit-tightening policy stance.

Speculation over a possible rate cut has already spread in the markets. On the other hand, expectations for an economic recovery in the second half of the year remain strong. The Fed has maintained its projection of one rate hike in 2020.

The Fed likely will be urged to strike a more difficult balance in its policy management.

It is important to have a thorough “dialogue with markets” so that the intentions of the Fed’s monetary policy are properly reflected in the markets.

Fed Chairman Jerome Powell has changed his remarks on rate hikes and asset reduction several times since last autumn, causing market confusion. Words and deeds by a Fed chairman have significant impact on economic activities and stock prices.

Remarks that could make it difficult for markets to figure out the real intentions should be strictly restrained.

Caution needed for risks

U.S. President Donald Trump harshly criticized the Fed’s policy stance in favor of rate hikes, fueling speculation at one point that Powell would be dismissed from the Fed’s top post. But the Fed chairman reversed the stance on raising interest rates only three months after the end of last year, spurring speculation that he has given in to pressure from the Trump administration.

The Fed should be careful to prevent its independence as a central bank from being questioned. It must enhance the transparency of its policy management by patiently elaborating the reasons and circumstances behind its policy decisions.

It should be also noted that the Fed’s pause on rate hikes will allow its policy rate to remain low.

Even if the Fed decides to cut interest rates during the next period of recession, the effects of such a move will not be sufficiently felt as there is little room for policy measures.

If the Fed’s asset portfolio remains large, a large amount of money supplied by monetary easing will be left in markets. Vigilance must be maintained against the risk of bubbles in countries such as the United States, China and emerging economies.

The Fed’s pause on rate hikes will make it difficult to widen the difference in interest rates between Japan and the United States. If speculation over a rate cut by the Fed grows, pressure toward a stronger yen could increase.

The Bank of Japan’s additional monetary easing measures will face a limited number of options. Japanese financial authorities need to keep a closer eye on how the Fed’s monetary policy will unfold.

(From The Yomiuri Shimbun, March 23, 2019)Speech

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