The latest Fed decision affirms China’s rise, but not in a good way

September 21, 2015
Janet Yellen delivers a speech at the International Monetary Conference in Shanghai, China, Monday, June 3, 2013. (AP Photo/Eugene Hoshiko)

China desires recognition of its arrival as a force in the global economy. When the United States failed to make room for China at the head of the table at the International Monetary Fund, Beijing created new international lenders. Chinese leaders continue to push for the inclusion of the yuan in the basket of currencies that back the Special Drawing Right (SDR), the IMF’s in-house unit of exchange. It would be a symbolic gesture, as the SDR has no role in global finance. Symbolism appears to be what China covets.  

If it is status Beijing craves, it could take note of the special attention China received at the latest meeting of the United States Federal Reserve’s policy committee on September 16-17, 2015. China played a central role in one of the most anticipated Fed decisions ever. That’s a testament to China’s rise. The Fed keeps a constant watch on global events, but rarely do they influence policy. Alas, Chair Janet Yellen’s comments on the world’s No. 2 economy weren’t exactly a tribute. Policy makers balked again at raising interests rates and China’s troubles were the biggest reason why.

Ahead of the policy meeting, intellectual opinion was split on whether the Fed should raise its benchmark interest rate from zero. Yellen said at a press conference that there was an argument for lifting borrowing costs and that the Federal Open Market Committee (FOMC) considered doing so. But only Jeffrey Lacker, president of the Richmond Fed, ultimately voted for an increase. The other nine voting members of the committee opted to leave policy unchanged until at least the end of October, when the committee next gathers.

The case to reduce monetary stimulus is based on the U.S. unemployment rate, which dropped to 5.1 percent in August, the lowest since early 2008 and comfortably in the range that the Fed equates with its mandate to achieve “maximum” employment. Yellen acknowledged that the U.S. economy was “impressing us” with the pace at which it was creating jobs. But the Fed also has an inflation mandate. Prices, to quote the policy committee, are advancing “well below” the central bank’s longer-run objective. The FOMC’s revised median estimate of inflation for this year is 0.4 percent, compared with 0.7 percent in June. The Fed’s target is 2 percent.

So after years of worrying primarily about employment, the Fed’s focus now is inflation. The central bank’s credibility “hinges on defending our inflation target,” Yellen said. Enter China. The Fed chair said the slowdown in China is partly responsible for disinflationary pressures in the United States and the big stock-market losses this summer. She also observed that weaker growth in China had caused commodity prices to fall, and that in turn was hurting growth in many emerging markets, and even Canada, one of the United States’ main trading partners. Yellen said the Fed’s outlook hadn’t fundamentally changed, but that these events had given policy makers pause. She said their concern about the short term was heightened by uncertainty over whether Beijing is up to the task of managing the situation. 

“The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect,” Yellen said. “I think developments we saw in financial markets in August in part reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the deftness with which policy makers were addressing those concerns.”

Contrast those comments with Yellen’s thoughts on Russia’s economic troubles late last year. Tensions between Russia and Kiev were at their height in December, and Europe was in no condition to absorb a war on its borders. Bank of Canada Governor Stephen Poloz called the situation in Central Europe the biggest threat to global economic growth. Yellen said the spillovers from Russia to the United States would be “small.”

China’s leaders will dislike having their “deftness” challenged by the leader of the United States’ central bank. They can, however, take solace in the fact that they at least have the Fed’s attention. That’s a status few countries ever achieve. 

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

Kevin Carmichael is a senior fellow at CIGI and the national business columnist at the Financial Post.