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Even though it is important to try to curb inflation by raising interest rates, it would be problematic if rate hikes cool the U.S. economy. The U.S. Federal Reserve Board needs to steer its monetary policy, while keeping an eye on the economy at home and abroad.
Following the lifting of the de facto zero-interest rate policy in March, the Fed raised its benchmark interest rate by 0.5 percentage point on May 4. It was the biggest rate hike in 22 years, lifting the federal funds rate to a range of 0.75% to 1%.
The Fed has continued its quantitative easing policy, in which it pumps a large amount of money into the market by purchasing government bonds and other means, but it also indicated it would begin reducing asset holdings on its balance sheet. This will reduce the amount of money flowing into the market and have the effect of tightening monetary policy.
In March, the U.S. consumer price index grew at the highest rate in about 40 years. The rush to tighten monetary policy to curb inflation is understandable.
Fed Chairman Jerome Powell expressed his intention to continue raising interest rates at a press conference, stating that it is essential to bring down inflation.
On the other hand, the dilemma is that sharp monetary tightening could lead to a deterioration of the economy. As economic risk factors are increasing around the world, the Fed needs to closely examine the impact of the monetary tightening policy.
Russia’s invasion of Ukraine has been fueling a surge in the prices of resources and food. Developing countries with low income levels have suffered huge damage. There are concerns that the U.S. interest rate hike could lead to an outflow of funds that have been invested in emerging economies and developing countries, as investors search for higher yields.
In China, which has adopted a zero-COVID policy, cities such as Shanghai have been under lockdown. Stagnation in production and consumption in China, which is described as the “world’s factory” and has a huge market, is expected to have a serious global impact going forward.
In the United States, the stock prices of tech firms and other companies that had been expected to rise have recently fallen. The market rose on May 4, when Powell indicated at the press conference that he was negative about future interest rate hikes exceeding 0.5 percentage point at one time, but the outlook is uncertain.
The Fed should carefully adjust the pace of interest rate hikes by closely examining conditions in the global economy and financial markets.
For Japan, it is worrisome that a U.S. rate hike could cause the yen to further weaken.
In April, the Bank of Japan decided to continue monetary easing, aiming to keep long-term interest rates at around 0%. If the interest rate gap with the United States widens further, it would be more advantageous to invest funds in the United States, which could easily lead to a stronger dollar and a weaker yen.
Rapid market fluctuations also have a significant negative impact on the economy, such as by making it difficult for companies to make business plans. The government and the Bank of Japan must continue to monitor market trends closely.
