Weak Fed chief means world faces excess US dollars

By Wu Qing Source:Global Times Published: 2018/2/6 23:53:40

Illustration: Peter C. Espina/GT

Quantitative easing (QE) is over in the US, but an easy-money policy continues. This is the current monetary policy stance adopted by the US Federal Reserve. As a result, the US dollar started 2018 with a rapid decline.

The plunge took many off guard. The performance of the US Dollar Index, which opened at 102.39 in early 2017 and fell more than 10 percentage points throughout the year, surprised many observers. Some investors think that the US dollar has bottomed out, the US economic recovery is basically in line with expectations, the Fed will continue to raise interest rates and other favorable factors will support the US currency.

Given those assumptions, the US dollar might rebound at any time. But the current situation is exactly the opposite of what these investors have expected.

Why does it look like the US dollar may be weak all during 2018? Let's first talk about the pursuit of a neutral monetary policy. If the Fed's monetary policy stance is neutral (neither tightening nor easing), what should we observe? If monetary policy is genuinely neutral, then the comments of the voting members of the Federal Open Market Committee (FOMC) should show a normal distribution.

However, according to my data analysis, this is far from the case. The number of FOMC members who think interest rates should be raised far exceeds those holding the opposite view.

If everyone expects the Fed to raise rates, this suggests that current US monetary policy is in an easing state, and the Fed is about to raise interest rates (tighten monetary policy).

Two successive Fed chairmen (Ben Bernanke and Janet Yellen) did not bring about the return of a neutral monetary policy, and it is unlikely that Jerome Powell, who took over on February 3, will be much different.

Powell hasn't been in the Fed for very long and he hasn't made much of a mark there. Nor does he have a strong academic background like Bernanke. Further, he is unlikely to have strong persuasive power in the FOMC. He is likely to be a weaker Fed chairman, one who will find it difficult to control the overall situation.

The weaker the Fed chairman, the more likely he will choose a one-way rate hike path. There are both rational and irrational reasons to choose such a strategy.

From 2014 to 2015, the currency market priced in possible Fed policy adjustments. Thus, the monetary policy effect of the Fed is already reflected in currency rates, and the Fed can slow the pace of interest rates. If interest rates are raised too fast, resulting in a hard landing of asset prices, that could mean trouble. This is the rational reason.

Generally speaking, if monetary policy is neutral, small ups and downs in interest rates are normal. However, both Bernanke and Yellen were reluctant to see any forced decrease of interest rates after rapid rises during their tenures, giving them the reputation of "raising interest rates too fast." This is the irrational reason why one-way rate hikes can go on for so long.

So far, the reasons for the Fed's decision to unilaterally raise interest rates have not changed, so it might continue on this path. Therefore, we can safely predict: the US dollar will be weak, global liquidity will be relaxed, asset prices have the opportunity to hit new highs and non-US currencies, including the yuan, will still have the pressure of continuous appreciation.

The world will again face the problem of excess US dollar liquidity, which appeared at the beginning of this century.

The author is chief economist of China Orient Asset Management Co. bizopinion@globaltimes.com.cn


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