Is the Fed's strategy of "waiting and watching" effective?

(Baonghean.vn) - On the afternoon of September 17th, local time, after weeks of speculation and anticipation from investors and analysts, the US Federal Reserve (FED) decided not to raise the benchmark interest rate, at least for the next month. Explaining this move, the FED stated that "recent global economic and financial developments may, to some extent, restrain economic activity."

US Federal Reserve Chair Janet Yellen at a press conference on September 17 in Washington. Photo: Reuters.

Immediately after this information was released, Janet Yellen, Chair of the Federal Reserve, clarified the central bank's position, but indicated that it had not ruled out the possibility of raising interest rates this year, when officials of the agency will meet in December. In a statement issued on September 17, the Fed said that the near-zero benchmark interest rate, which has been in place since 2008, "remains appropriate" and that monetary policy aims to "support continued efforts toward maximizing employment and price stability." In a move widely interpreted as a reference to the recent crisis in the Chinese stock market, the US central bank added: "Recent global economic and financial developments will restrain economic activity to some extent and are likely to increase pressure on inflation in the short term."

It can be said that China's slowing economy, to a greater or lesser extent, influences the decisions of the US central bank. Bloomberg also shares this view, suggesting that with the world's second-largest economy still sluggish and Chinese stock market indices remaining significantly lower than at the beginning of the year, this is likely the reason behind the Fed's recent decision. The Fed has been very cautious about whether or not to raise interest rates, because in the current situation, a careless move could lead to significant repercussions. Bloomberg believes that the Fed keeping interest rates unchanged primarily means that in the short term, any major or significant changes to the central bank's monetary policy are unlikely. In other words, the Fed is unlikely to raise interest rates until the uncertainty surrounding China's impact on the global economy has been at least partially resolved.

According to Deutsche Welle, the Federal Reserve's decision to maintain current interest rates is based on the economic reality and will benefit many emerging economies. The newspaper argues that the Fed could have raised the benchmark interest rate but chose not to, and that was a correct decision. The head of the agency undoubtedly weighed the pros and cons before taking the next step, considering the downward trend in the US consumer price index, the prospect of rising inflation, etc. Even the issue of employment, which receives much attention in the country, with an unemployment rate of only around 5%, is considered more symbolic than realistic, as many recent jobs are only part-time and very low-paying. Therefore, the situation is not entirely bright when compared to the Fed's main goals of employment or price stability. For struggling markets like China and emerging economies, a US interest rate hike would not bode well, as it would attract more foreign capital into the US, while those economies need more capital to cope with their mounting debt. Deutsche Welle believes the current situation may be more serious than we realize, and this may not be the right time to implement austerity measures.

Although the benchmark interest rate remains unchanged for the time being, the possibility of an increase in the future, as mentioned above, cannot be ruled out, especially since the Fed believes that raising the benchmark interest rate is appropriate and should be done once its policy-making committee believes that the labor market has improved and the Fed has sufficient grounds to believe that inflation will return to its 2% target in the medium term. Many economists have expressed concern that the current low inflation rate could become deflationary if interest rates rise. Fed officials have also indicated that once interest rates begin to increase, the pace and magnitude of the increase will be very slow and gradual. The US central bank might even make an initial increase, then pause for several months to assess the overall situation before making any further decisions. Many in the investment community believe that once the Fed raises interest rates, interest rates on mortgage loans for individuals and businesses will also increase, impacting the economy.

Some observers believe the Fed will only raise interest rates once, and according to the markets, this move is more likely to happen in 2016, not this year. Objectively speaking, the Fed's benchmark interest rate isn't necessarily the most important factor – after all, a rate of 0.25% or even 0.5% doesn't have much impact on the financial and business calculations of banks, businesses, or the federal government in the US and around the world. Much more important is the mechanism by which this agency operates – the decision-making process the US central bank uses to respond to inflation, unemployment, and other economic variables. The impact of the Fed's monetary policies depends entirely on people's expectations of how the Fed will respond in the future.

Thu Giang