The Federal Reserve, under the leadership of Jerome Powell, is currently facing a significant dilemma regarding the direction of US interest rates. This confusion stems from the fluctuating inflation rates, a soaring US dollar, and the chaos surrounding the US election.
Economists like Mark Zandi, chief economist at Moody’s Analytics, argue that the Fed should lower interest rates to prevent the economy from being undermined. On the other hand, Bill Dudley, former president of the Fed Bank of New York, suggests that the Fed should maintain high interest rates until inflation moves in the desired direction.
Similar dilemmas are faced by the Bank of Japan (BOJ) and the People’s Bank of China (PBOC). The BOJ, under Governor Kazuo Ueda, has missed opportunities to pivot towards a less accommodative policy, and the yen’s decline could potentially cause instability in world markets. The PBOC, on the other hand, is facing a deflation dilemma due to China’s property crisis and overcapacity issues.
In the US, the focus of the Fed is on inflation, but there are concerns that the Fed’s “higher for longer” yield policy could exacerbate dislocations in credit markets. The US dollar’s strength is also causing credit strains in the US commercial property sector and posing risks to Asia’s export-reliant economies.
The 1994-1995 period, when the Fed tightened aggressively, serves as a reminder of the impact of a strong dollar on Asia. The fear then was that China might devalue, causing market turbulence. Today, Asia faces a giant shock from the other direction as global investors are losing faith in the dollar as a systemic risk.
The de-dollarization movement is gaining momentum, and the US national debt, which is currently at $35 trillion, is expected to reach $50 trillion by 2034. The stability of the dollar was shaken anew in mid-November when Moody’s Investors Service threatened to downgrade the US, which could lead to a significant increase in US 10-year yields.
In conclusion, several central banks, including the Fed, the BOJ, and the PBOC, are on the verge of making policy mistakes that could potentially shake the global financial system. The US election, inflation, and the strength of the US dollar are key factors contributing to this uncertainty.
