What the US Rate Hikes Mean for Asian Economies: Bruce Kasman / Chief Economist, JPMorgan Chase

Hello and welcome to DEEPER LOOK from New York.

I'm Del Irani, it's great to have your company.

The US Federal Reserve has raised interest rates for the third consecutive time this year by a whopping 0.75 percentage point.

To put this in perspective, when the Fed raised rates by the same amount three months ago - the Chair of the Federal Reserve said it was an "unusually large one"

and he didn't expect moves of this size to be common.

But the rates hikes were expected in order to curb inflation - the rising price of goods and services.

Nonetheless, this move by the Fed will have global implications causing currency depreciation and stock markets declines, especially in Asia.

So, let's break that down.

Just how significant will the global impact of these rate hikes be?

And how should Asian economies respond?

Joining me now to talk more about this is Bruce Kasman.

He's a chief economist and Head of Global Economic Research at JP Morgan Chase, and he joins me now.

Welcome to the programs to Mr. Kasman. Great to have you with us.

Thank you for having me.

So, I'd love to get your take on the recent rate hikes by the US Federal Reserve.

What do you make of it?

Was it the right move, at the right time?

Well, first, we should just say it's been remarkable what the Fed has been doing.

They delivered the third straight 75 basis point rate hike.

And not only have they moved aggressively, but they're telling us they're going to continue to move aggressively.

Right now, they're signaling at least in their own forecasts another 125 basis points moves this year, and perhaps some more into 2023.

So, the Fed has moved policy remarkably fast.

And I think it is appropriate.

It's appropriate because in the aftermath of the pandemic, we're seeing some major changes in the landscape on inflation in the United States.

Both as the signal from the data is that labor markets are tight and starting to put cost pressures in the system.

In addition, I think we're starting to see the salience of inflation begin to affect wage and price behavior.

That's happening by the way, in an environment in which we are starting to see simple light chain bottlenecks ease, we're starting to see energy prices,

at least in the oil space, come off.

So, there's a funny story here, which is the Fed is getting more aggressive.

It's getting more worried about controlling inflation over the medium term.

But it is also seeing, and I think we will continue to see this the next few months, a fairly precipitous fall in headline inflation in the United States and in many countries around the world.

You know, there have been concerns that if the Fed is too aggressive with rising interest rates, it could push the US economy into a recession.

Just how much of a risk of that is there?

I mean, how much of a risk of the US heading into an economic downturn?

Well, I think the good news is in the face of what has been fairly substantial and multiple shocks this year, the economy has shown quite a bit of resilience.

And I think, the health of the private sector, both household balance sheets, as well as businesses speak to the case for that.

However, I do think the risks that we go into recession here, over the next 18 months or so, it's gotten more substantial because of what the Fed is telling us.

The Fed is telling us that it is decided that it needs to see higher unemployment in order to contain inflation pressures, and that it's committed to doing that.

That's a very difficult task to achieve without over shooting, and without putting the economy into something where there's more powerful and magnifying forces,

which is what we call a recession.

So, I think when you listen to Powell, and listen to Fed speakers more generally, you're seeing a level of concern, a level of commitment to not only bring inflation down,

but bring inflation down through the channels of weakening the labor market, that I think you have to believe the risk of a recession in the US,

even with this resiliency signal is very high.

What type of data is the Fed looking for?

I mean, what are the signals they're looking for from the economy in order to decide do we continue to raise rates?

Or do we just hold for a bit?

So, I think the Fed has pretty well committed to another large rate hike at the November meeting.

We're now looking for 75.

I think we can see the data and debate whether they deliver that 75 or perhaps stepped back modestly to 50.

I think what the Fed needs to see is not just the move down and headline inflation.

They need to get a sense that you're breaking the inflation fever in terms of expectations, in terms of the breadth of core inflation.

And what they're arguing.

And this is really the important message from this week, is that they don't think that is going to be established on a sustainable basis to get inflation down to 2%,

unless they're also seeing a labor market that is putting the unemployment rate on a path to go materially above 4%.

We're at a 3.7% now.

So, they need to see both the moderation in core inflation, as well as the containment of expectations, as well as the easing in labor market.

Those are three things they need to see, to consider a pause.

I think you're seeing early signs that their aggressive actions are starting to contain expectations.

But in both of the other two cases, the underlying inflation pressures and the labor market, the Fed has not really achieved much progress at this point.

And that's why they're telling us they've got still quite a bit of work to do.

What's going to be the impact of these rate rises, not only right now, but in the future on, you know, other countries, particularly in the Asia Pacific region?

Well, I think the channels here are multiple and we should recognize them.

One channel, of course, is the fact that with the Fed raising rates so significantly, and also in a world in which we have significant concerns about

what's happening in Europe, both geopolitically and economically, the dollar is getting a lift upward.

That lift is having important effects in Asia.

Obviously, it helps Asian exporters.

But the combination of Fed tightening slowing US and global growth, the pressure from weaker currencies in areas where there still is inflation concerns and

central banks that are having to move, are putting pressure on central banks.

There's some combination of intervention that's taking place, there's more rate hikes that are taking place.

And I think we should be recognizing that with the notable exception of Japan, there are a lot of central banks that are going to have to continue to tighten

and tighten more as a result of what the Fed is doing here.

And I think the outlook for Asia is centrally driven by the fact that the Fed is telling us it's going to slow US growth down.

But there are two other factors I would just mention in passing here.

One is how China manages its housing slowdown and its COVID problems.

And in addition, it does feel to us after a good two-year run, in which the tech sector has been booming in the aftermath of the pandemic, for a number of reasons.

It does feel to us that that sector is coming down to earth here.

So Asian industry, I think, is going to get hurt by slower tech, by slower China, and buy a higher Fed, a more aggressive Fed.

All of those things are going to weigh on Asian growth and put pressure on Asian central banks over the next six to nine months.

When you talk about Asian economic growth, you mentioned, of course, you know, Fed indicating slower growth here in the US.

Do you see perhaps slow growth hitting Asian economies as well?

No doubt.

I think the tension in Asia is we do believe the region has an important positive impulse, as it is in a somewhat delayed fashion getting the reopening from COVID,

the service sectors picking up Japan, tourism picking up, things of that cross- border movements.

That's a big positive that the region has, and should expect to get dividends from in the next six to nine months.

But a slower China and a tighter Fed and a weaker tech sector are big offsets.

And it's the balance of those things, which are determining our forecasts that has Asia, growing at a sluggish pace, not really, in my mind at risk of going into recession,

but also not getting the kind of growth we'd like to in an environment which recoveries are still incomplete across the region.

Let's talk specifically about the Japanese yen, because when you mention declines, I mean, that currency has been dropping to more than 20-year low in recent months.

However, you know, the government and central bank intervened recently to help the currency after the US Fed announcement.

So, to what extent is that going to help the Japanese yen?

And, I mean, what impact is the US Fed really having on Japan's economy?

So, I think when we talk about the Yen, I think we have to recognize that there's two pieces to the Yen's fall.

One is the aggressive Fed action, and the pressure that's coming from a broader move up in the dollar in the global economy.

But there's also the fact that the Bank of Japan has been the sole developed market central bank that has maintained emergency policies.

What is remarkable is that in the very quick aftermath of a BOJ that sent very dovish signals MOF came in and intervened in the currency market.

And there we have, I think, the crux of the issue of what the Yen is going to do next.

And I think that's where the really interesting dynamic around the Yen is right now, as you're seeing your central bank and your ministry of finance,

basically push and pull the currency in two different directions.

Of course, some higher federal interest rates from here in the US mean higher borrowing costs for a lot of countries, particularly the emerging economies in the

Asia Pacific region that have a lot of debt.

How will it make this issue worse?

And how vulnerable really are some of these emerging Asian economies?

Well, I think there's a very good message here that if you look at current account positions, if you look at balance sheets of the corporate and the household sector,

if you look at the interest sensitivity of those balance sheets, we're in a much healthier place, with the one notable exception of China.

Where China has got a very significant overhang in housing and has significant issues around debt and dollar denominated debt.

So, I think what's an interesting storyline here is that the global economy is pretty well positioned for dealing with a US interest rate rise.

We're not in the circumstances we were, you know, recently in terms of the taper tantrum in 2013, which had major repercussions.

But we do have this issue of how well China manages its unique position in terms of having credit overhangs, having a housing sector problem,

and having some issues around its currency weakening, and the degree to which there's dollar denominated liabilities of the of the corporate sector.

But I look outside of China, I think the basic issue here is not the impact of higher interest rates from the Fed, it's the interesting question of whether or not

the US and European economies go into recession, which would be the dominant driver of a macro risk scenario for the region.

So, what would your advice be to countries in the Asia Pacific region like Japan, and you know, many other countries in Asia.

How should they respond to these, I guess, global pressures and the fact that you've got the US Fed that may continue to raise rates in the near term.

So let me just say one thing, because we've talked a lot about the downside.

And I do want to emphasize two things that are happening here, which are positive both for the region and for the globe.

One is we are seeing supply chain pressures moderate; we are seeing oil prices having come off, we are getting a major turn in headline inflation,

that is going to restore purchasing power.

The second thing I think we should recognize is that there is a healthy underpinning for the private sector and particularly for the region where we do think the COVID

dividend from opening up service sector for letting people start to move around the globe is actually a positive.

So, I want to make sure we see that balancing of what are meaningful drags, and I think, an overriding risk if the US economy would go into recession,

with a region which has, I think, some reasonably good prospects to be resilient and cushion the blows.

And it's that context that I think we want to see policymakers perform here.

I think you do have to deal with the problems of underlying inflation, which we talked about earlier in the US.

They're not just in the US.

But you also, I think, have to continue to manage your economies for getting more complete recoveries.

The recoveries across Asia are not complete, and in some countries still are woefully behind, Japan being one of them.

So, I think the reopening of the services sector, the benefits of the BOJ staying on the ball, continuing to be, you know, supportive of reflation,

which I think ultimately is an important Japanese goal.

And, you know, managing the potential stresses of currency strength from the dollar, higher interest rates.

And, you know, I think being sensitive to that is the important thing.

So, I'm really trying to give you a sense of a region, which has some substantial tail risk from US downside, but it's actually in an environment of cross currents,

which I think will deliver modest growth, and quite divergent growth across sectors over the next six to twelve months.

Thank you so much for your balanced view of what's happening in the global economy, Bruce.

Really appreciate it.

Great talking to you. Thank you.

Thank you.

In the coming months, the Fed will be closing monitoring the US economy to see if the recent rate increase has eased inflation.

If it hasn't and prices remain high, the US Federal Reserve may have to raise rates again and that will have significant implications for the world economy.

I'm Del Irani, thanks for your company.

I'll see you next time!