WN: Fed likely to defer interest rate hikes unil 2016
The Federal Reserve is likely to defer the widely anticipated interest rate hike, a move which will relieve downward pressure on the renminbi, reports Shanghai's National Business Daily.
Hints of a deferment can be detected in the minutes of the Federal Open Market Committee (FOMC) meeting in late July, just released by the Fed, according to interpretation of most analysts. Economists at Barclays Capital US now predict that the Fed will not hike interest rates until next March, citing recent market turmoil.
Wang Zihong, director of the economic office of the American Institute under the Chinese Academy of Social Sciences, also believes that the Fed will defer to next year, due to low inflation and the need to further consolidate the US economic recovery, according to the report.
Tan Yaling, president of the China Forex Investment Research Institute, though, challenges the viewpoint, insisting on the inevitability of the hike in September, citing the stable performance of the US economy. The PMI (Purchasing Managers' Index) was still recorded at 52.9 in August, higher than 50 and indicating continued economic expansion, according to the report.
In addition, says Tan, the transaction volume for pre-owned homes in the US expanded for the third straight month in July to the highest level in eight and half a years. As well, the number of applicants for unemployment subsidies for the week ending on Aug. 15 only increased slightly.
The only uncertainty is the latest inflationary figures. The growth rate of the core CPI in June, released after the FOMC meeting, exceeded 2%, although the average growth for 12 months has fallen below 2%.
Wang Zihong said that, in addition to low inflation, the Fed still has a number of policy tools at its disposal, enabling it to defer interest rate hikes to next year.
The Fed is closely monitoring the movement of the US dollar exchange rate and is likely to hike interest rates once the US dollar index drops below 90, adding that the US interest rates will inevitably adjust towards the normal level of 4%-5%, from the existing ultra-low rates, in order to avoid a market bubble.
While the US interest rate hike will relieve the pressure of devaluation on the renminbi, the movement of the latter currency will still hinge largely on domestic factors, since the renminbi is not a freely convertible currency, Tan said.
