Economic Update


End of an Era

The U.S. Federal Reserve raised its benchmark interest rate from the 0-0.25% range to 0.25-0.5% on 16 December. On the back of steadily recovering economic momentum and a stronger labour market, the move marks the end of a seven-year period with close-to-zero interest rate.

Improvements in job market affirms decision

The Fed’s decision was supported by a stronger job market, among the other indicators. However, analysts do have diverging views on this, with one camp believing that the U.S. job market has been improving steadily, while others suggesting that it remains fragile and the improvement is largely due to a reduction in the labour participation rate. We do not agree with the latter.


Employment in the U.S. has been increasing steadily since January 2010, when employment fell to 136.8 million people, comparing to the pre-Global Financial Crisis (GFC) peak of 147.3 million in July 2007 (Chart 1). As of the end of November 2015, 149.8 million people had a job in the U.S., roughly 1.7% higher than the pre-GFC peak and up 1.4%YoY. While it is true that such increases in employment were backed by the robust expansion of part-time employment between July 2007 and November 2015 (15.7%), full-time employment has been catching up, too (up 2.1%YoY). Among other positive indicators is the so-called high value-added “management, professional and related” jobs category, which has been leading the gain (2.7%YoY), and now represents 39.2% of total employment (Chart 2) – the highest since 1983, when tracking of this category began.

Looking ahead

At yesterday’s post-announcement press conference, Federal Reserve Chairwoman Janet Yellen reaffirmed that the Fed had been “prudent” in its decision prior to lifting the interest rate. Further rises will likely come over the course of the next two years, but we are unlikely to see anything like the 17 rate hike streak that we saw between 2004 and 2006. From the overnight announcement, only four Fed officials said they expected that the fed funds rate to climb to 3% or higher by 2017, while seven of them showed such expectation in an earlier meeting in September (Table 1).

Going forward, the Fed will likely continue its accommodative monetary stance given the balanced economic and labour market outlook. The announcement suggests that the job market conditions should continue to improve, while inflation will move towards the 2% target in the medium term. 

Implications for Hong Kong

As our Hong Kong Dollar (HKD) is pegged to USD, the Hong Kong Monetary Authority (HKMA) matched the Fed’s move and raised its base rate by 25 basis points, from 0.5% to 0.75%, on Thursday. The immediate effect would be that borrowers might have to bear higher borrowing costs, should the lending banks follow HKMA’s move. Nevertheless, with the moderate pace of rate adjustment and low unemployment, the impact of increased interest expenses could be absorbed. 

The rate hike was anticipated and priced into our forecast released last week. With the diverging directions of central bank movement between the Fed and the PBoC, the relative strength of the HKD will ease imported food inflation, and help keep inflation (CPI) to around 2.5%YoY in 2016. However, further strengthening of the HKD would hurt Hong Kong’s competitiveness. It would also affect our attractiveness as a destination for tourists, and further weaken visitor arrivals and retail sales (Chart 3), among the others. 



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