With US rate cuts on the horizon, the glass looks half full again

August for leading central bankers means a trip to Jackson Hole. That’s where the Kansas Federal Reserve Bank is hosting central bankers, finance ministers, academics and financial market participants at its annual economic symposium, held since 1974.

But the “vast majority” of the committee also felt that if “data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”.

After decades of near-zero rates, Japan is by far the largest holder of Treasuries, with over US$1 trillion worth of the US government paper, contributing to a staggering net international investment position of over US$3.2 trillion at the end of March.

But as Japan’s interest rates normalise, and with US rates expected to fall, Japanese investors will find US bonds less attractive and will return to yen bonds. The narrowing interest rate differentials between the dollar, yen and euro will also ease pressure on the dollar to rise.

Given the “exorbitant privilege” of the US dollar as the world’s major medium of exchange and store of value, the Federal Reserve is in fact indirectly responsible for global monetary conditions. Its cutting of US interest rates would, therefore, help to have a reflation effect on global liquidity.

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All in all, those who view the world as a glass half full, like myself, see better days ahead for emerging markets, as lower US interest rates will mean a reversal of flows back to these markets.

The coming days will be a roller-coaster ride. Predicting the future is a hard business.

Andrew Sheng comments on global affairs from an Asian perspective