Low-Interest US Environment Cannot Last

The United States Federal Reserve system announced after its meeting two days ago that it will remain “patient” with its monetary policy normalization, hinting that it will not raise interest rates in its next two meetings before June. Actually, the American economy has recently expanded steadily, having already escaped the financial crisis. When an economic body maintains steady growth but low interest rates, this produces not only an economic bubble, but also a plague. The Fed saying it will not raise interest rates before June does not necessarily mean that the USA’s low-interest environment will last. The U.S. is already set up for raises, and the Fed’s large opportunity this year could damage Hong Kong’s real estate market. Authorities will need to think of a plan soon, and real estate buyers should act carefully to avoid losses.

The Fed stated that its main reason for delaying an increase in interest rates is not the American economy, but the circumstances of its surroundings. International oil prices have fallen from $108/barrel in June 2014 to $50/barrel today, a new low in five years. This drop is like quantitative easing in disguise, restraining every country’s inflation. Another thing is that European countries are still slow to recover, as they have yet to find a balance between debt removal and economic stimulation. As if this were not enough, Europe is suffering an even heavier stress of deflation; expanding during deflation would devastate every country’s recovery process. Some time ago, the European Central Bank, with its strict monetary discipline, promoted large-scale quantitative easing by injecting a large volume of funds into its market, stimulating Europe’s economy to escape deflation. The world’s economic situation is turbulent, dropping the euro and raising the dollar. As long as this is the case, the Fed will need to be extra careful in raising interest rates.

However, the announcement makes clear that “patience” means that the Fed has not at all changed its original pace, but is instead adapting to new circumstances by patiently waiting for the best opportunity to pave its road to higher interest rates. In fact, the U.S. already has everything prepared with its stable economic growth and a new low in its unemployment rate. If the U.S. stays in an unreasonable zero-interest environment, not only would it twist the money market even more, but it would also create another economic bubble, like a newly buried time bomb. Therefore, the Fed’s determination to raise interest rates makes no room for suspicion. If there are no more big economic changes in the periphery, the Fed’s opportunity after June will be huge. This will mean a pick-up in Hong Kong’s interest rates as well, as the main factors propelling a skyrocketing real estate market will take a turn. Under a real estate market with a high level of innovation, risks will grow larger. Authorities should keep a close watch, look deeper into tightening mortgage, and build a stronger financial firewall soon to protect Hong Kong’s real estate market and economic entity from the interest spike.