MPDD Policy Briefs No.32, January 2016 "The potential impact of monetary policy normalization in the United States on Asia-Pacific economies"

MPDD Policy Briefs No.32, January 2016 "The potential impact of monetary policy normalization in the United States on Asia-Pacific economies"

 
Date: 
Wednesday, January 13, 2016
Type: 
Public information and advocacy materials
Abstract

Amid gradual yet steady economic recovery in the United States in recent quarters, the Federal Reserve raised its policy interest rate by 25 basis points in December 2015; the first increase in nearly a decade. The new target range for the federal funds rate increased from 0-0.25% to 0.25-0.50%. The Federal Reserve’s projections suggest that monetary policy normalization would be relatively gradual, with the federal funds rate rising from about 0.4% in 2015 to 1.4% in 2016, 2.4% in 2017 and 3.3% in 2018, before reaching the long-run rate of 3.5%. Higher interest rates in the United States will put pressure on other economies to follow suit. Whether domestic interest rates in Asia-Pacific economies will increase accordingly depends on several country-specific factors.

Although the guidelines from the Federal Reserve indicate that monetary tightening would likely be gradual, what remains to be seen is the actual pace and sequence of the normalization, and whether this differs from market expectations.

While the estimated economic growth impact of higher financing costs in major Asia-Pacific economies is notable, a more worrying case is the impact on smaller developing economies that rely heavily on foreign capital to finance their investment needs.

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MPDD Policy Briefs No.32-Jan16Download