Markets feel sting of sub-zero chill

Editorial | Mary Ma 15 May 2020

US Federal Reserve chairman Jerome Powell has won many thumbs-up for pushing back on pressure to cut interest rates to sub-zero.

Let's be very clear on this: it is hugely irresponsible of any government to pursue a negative interest rate policy.

It's not only hard-working savers who are unjustly punished in a negative interest event - it's also the younger generations who will have to foot the bill for us.

Japan was the first major economy to move to a zero interest rate before lowering it further into negative territory.

It's still struggling to recover.

The European Central Bank switched to a sub-zero rate last year. All I can say is, "Good luck to them."

So, when Powell pushed back on US President Donald Trump's tweet that he wanted the rate to go below zero, the Fed chief deserved a pat on the back for showing some bravery in saying no to his boss.

Nobody is expected to be a yes man, and the Fed is expected to act independently of the administration.

But Powell had been suspected of throwing that independence out of the window after bowing to Trump's demands for interest rate cuts in the past.

The message of Powell's statement on Wednesday was very clear.

First, contrary to many investors' bets, he effectively ruled out a negative interest rate policy for the Fed.

Second, the administration's trillion-dollar-plus bailout of the US economy was far from enough, even though it was appropriate.

Powell called for more fiscal support from the White House and Congress to preempt an anticipated tide of company insolvencies due to the pandemic.

It was a desperate call. Perhaps Powell realized he has already used up all the tools at his disposal after the central bank cut the benchmark interest rate to zero and began rolling out unlimited quantitative easing.

Powell was trying to say he had done everything he could and that the ball was now in Trump's court.

The pushback on negative interest rate was sensible - but not necessarily good news for financial markets, including Hong Kong's.

Although the main street economy is still sluggish due to the lockdown, the Nasdaq has rebounded to the 2019 year-end level. And that is just unbelievable.

The rebound owes everything to stimuli. But will the mood change after all feel-good factors are priced in?

Adding to the weight is a drastic escalation in Sino-US friction over the virus.

While the tension is tied to the US presidential election later this year, it could cause actual harm to trade even if both governments manage to avoid military conflicts in the South China Sea and Taiwan Strait, where military activities including drills have increased dramatically.

Trump stepped up the rhetoric in one of his latest tweets, calling the virus "the plague from China."

Worse still, the phase-one trade agreement seems to be in danger of being torn apart following a telephone talk that Chinese Vice Premier Liu He had with US Treasury Secretary Steven Mnuchin and trade representative Robert Lighthizer.

Unfortunately, Hong Kong is sailing dangerously close to the storm.

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