Editorial | Uncertainty from the US will have impact on local interest rates

The decision by the US Federal Reserve to keep its benchmark interest rate steady was widely expected. What was unexpected were three key economic forecasts highlighted by Fed chairman Jay Powell in remarks to reporters after the meeting of the rate-setting federal open market committee.

One is that US inflation is likely to be 2.7 per cent at the end of 2025, meaning it is headed in the opposite direction to the 2 per cent target. Another is that American economic growth is expected to slow from 2.8 per cent in 2024 to 1.7 per cent in 2025. And the third is that the Fed chairman does not see inflation coming down to the 2 per cent target until the end of 2026, by which time he will have seen out his term of office.

This outlook is heavily influenced by US President Donald Trump’s plans to impose sweeping tariffs on US trading partners. On perhaps the first occasion anyone had heard Powell refer to “tariff inflation” in relation to Trump’s controversial trade policies, he kept talking about uncertainty, effectively underscoring how these tariffs are essentially derailing the Fed’s inflation target. Such measures “tend to bring growth down and push inflation up”, he added.

That said, he also downplayed it a little by saying that it could all be a one-off thing and that in the longer term inflation would settle back to 2 per cent.

Mainland China and Hong Kong – both trying to spur stronger economic growth – have reasons to hope that is how it plays out sooner rather than later.

If US interest rates remain higher for longer Hong Kong would be compelled to follow in lockstep under the local currency peg to the US dollar.