The Fed can shift policies if needed

Published November 7, 2018, 12:00 AM

by manilabulletin_admin

Billy Cortez
Billy Cortez

More than anything, the Fed, at the moment, is the unofficial world’s central bank, casting long shadow of influence over the monetary policies of many central banks around the world. It has asserted its authority over global financial groups, and has introduced rules aimed at protecting the global financial system that could trigger around of global financial instability. Needless to say, the Fed has assumed the role of the global banking cop.

At the very least, the Fed is the most credible institution that could help in a big way to push the return of the global economy towards a global level playing field essential for all nations. The global economy remains gripped with greater financial uncertainty, fluctuating energy prices, large currency disruptions, wide financial market swings, big government’s deficits and increasing global inflation, putting more additional expectations to the Fed beyond its original mandates.

More than anything, there’s divergence playing out in global economic landscape today. The US economy is booming while a good number of emerging markets are slowing down. The US consumer remains bullish. Market observers think the boom will continue to hold up in 2019. On a relative basis, the US remains the market leader.

But don’t pop the champagne yet, the strong growth will surely keep the Federal Reserve to stay on course with its current policy of a gradual rate increases. Analysts are expecting another rate increase (the fourth one) possibly in December raising unusual concern from US President Donald Trump; he has taken a contrary stance on the issue, going to the extent of saying the Fed is “crazy” raising the interest rates at this time. But of course, the Fed will doonly what it should be doing, stick to its present policy of gradual interest rate hikes, fully aware of its mandate to provide a safe, flexible, stable monetary and financial environment. As it is, the Fed is well down the path of normalization, slowly but surely raising rates and is now beginning to run down its $4.5-trillion balance sheet.

There’s no question that higher interest rates in US will yank billions of funds out of most emerging markets. Such event will cause local currencies, stocks and bond markets to weaken particularly if their governments haven’t done much to insulate their own economies from investors exodus. Rising interest rates, strong dollar and a flattening yield curve will cause tight financial conditions around the world. Its reasonable to expect that the Fed, tracking markets and reading economic data, will give more clarity on the timing of the next rate increase. As a matter of fact, some Fed members have publicly hinted raising interest rate a few more times until it reaches a level that’s neither encouraging nor discouraging investment and spending which, you can say, is par for the course.

The key for investors is to be nimble enough to take advantage of opportunities brought about by trends and economic data which are easily available at the tip of their fingers
We think the Fed would help the US economy grow faster by reducing monetary uncertainty and returning to a normal policy regime.

As Fed Chairman Jerome Powel, himself a Donald Trump appointee, puts it, “the US economy is in a really good place.” And the Fed wouldn’t have it any other way.

Atty. Billy Cortez is an independent board director at First Metro Securities Brokerage Corp. and First Metro Equity Exchange-Traded Fund (Metrobank Group). He was formerly FINEX president and co-chairman of the country’s Capital Markets Development Council.