Friday, 28 April 2006

Fed may pause, China not waiting

The focus of attention for markets yesterday was Federal Reserve Chairman Ben Bernanke's testimony to Congress. From Reuters:

Federal Reserve Chairman Ben Bernanke on Thursday said for the first time the central bank could at some point pause its 22-month interest-rate raising campaign to allow time to divine the economy's path.

Bernanke told Congress the economy was poised to slow and said the Fed's policy panel may opt for a hiatus even if inflation risks were elevated, leading financial markets to cut bets on a June rate rise while still wagering on one in May.

"Even if in the committee's judgment the risks to its objectives are not entirely balanced, at some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook," Bernanke said in testimony before the Joint Economic Committee.

"Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings," he added, signaling a willingness to reembark on the rate-hike course if inflation risks do not abate.

However, China's interest rate move yesterday also shook markets.

China raised interest rates for the first time in 18 months on Thursday, sending ripples through surprised world markets who saw the move as an attempt to prevent the emerging economic powerhouse from overheating.

The People's Bank of China raised one-year lending rates to 5.85 percent from 5.58 percent, prompting sky-high world oil and commodity prices and some stock markets to retreat.

In employment-related news, the US Labor Department reported yesterday that first-time claims for state unemployment insurance benefits rose by a larger-than-expected 11,000 last week to 315,000, but in Germany, the Federal Labor Agency reported that unemployment fell by 40,000 to 4.69 million and the adjusted jobless rate fell to 11.3 percent from 11.4 percent.

2 comments:

Steven Soh said...

It is not that unusual for China moving its lending rate up to 5.85% from 5.58 or an increase of 27 basis points in order to cool off the overheated economy because of the vibrant economic activities not only in exports but also in terms of domestic spending as well as the looming property bubble.Furthermore, the rise in interest rate is a signal that China is determined to do whatever it can ( even by administrative means )to consolidate the market forcefully although it is doubtful that China would let its currency or the RMB to appreciate, which would pouring oil into the fire and then subsequently creating an Asset Price Bubble that Japan had so painfully been experiencing when it agreed to let Yen to appreciate given the forces from the U.S. in the Eighties of the last Century.

Anyhow China is getting smarter and has been learning fast from Alan Greenspan who has been good at gesture instead of actual implementation so as to avoid recession in the last five years after the Internet Bubble bust.....
and this time, it would be ben Bernake to be personally involved....I would keep my fingers crossed for that and let's see....uh

Steven Soh

lim said...

"it is doubtful that China would let its currency or the RMB to appreciate, which would pouring oil into the fire"

Not so sure about that. Most would say that a stronger currency would tend to cool the economy rather than pour fuel on it. For example, see comments from Nouriel Roubini, Brad Setser and Andy Xie.

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