When Hike Meets Hiatus - The kind of Fed’s lift-off that Asia wishes for

The FOMC still looks keen on hiking soon, with September lift-off remaining in play. What really captured our attention is that the scenario of a one-time-only hike this year has gained more acceptance among FOMC members.

By hiking and then signalling for a pause, the Fed could kill two birds with one stone: Get the market to start adjusting to the reality of higher rates, while proactively assuaging fears that a sharp incline is coming next.

To be sure, for EM Asia that has ridden on the coattails of ultra-low rates for so long, the first hike will still hurt. But if the pain’s unavoidable anyway, is it not comforting to know that it could have been a lot worse?

It’s Been Awhile
Let’s start by being clear about what we are not saying. We are not saying that the risk that the upcoming Fed funds rate hike would result in global volatility has diminished to a point whereby all coast is clear. Not at all.

After all, as and when it happens – still likely to be three months from now in September, judging from the FOMC’s tone – it would mark the very first time global markets have to contend with an increase in Fed funds rate since early 2006. If you want to be a stickler about timing it from the very first, initial hike of a cycle after a period of low rates, we have to go back even further to mid-2004. (That’s a good 11 years ago, when people got excited about iPod Mini and yet to hear of iPhone, much less of iPad).

This time round, the impact of the initial lift-off is especially hard to gauge. Not only has there been no Fed Funds rate increase for a very long time, it is also occurring in a global environment that has been accustomed with policy rates hugging the zero bound, as well. (Read Report)

Source : OCBC Treasury & Strategy Research Research

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