China has more wiggle room for policy maneuver as Fed signals slower rate hikes

WASHINGTON - China has more wiggle room to maneuver macroeconomic policy and manage exchange rates as US Federal Reserve signaled slower pace of interest rate hikes this year, US experts say.

After a two-day policy meeting wrapped up Wednesday, the Fed kept its benchmark short-term interest rates unchanged and lowered expectations for the path of rate increases this year, noting that "global economic and financial developments continue to pose risks" to the US economy.

The Fed's updated projections showed that policymakers expected the federal funds rate to rise to around 0.9 percent at the end of 2016, implying two quarter-percentage-point rate increases this year, down from four estimated in December.

The anticipation of slower pace of rate hikes signaled that policymakers don't want to be in a rush to raise rates amid global risks and they would like to wait for more time to assess the US economic outlook.

"Proceeding cautiously in removing policy accommodation at this time will allow us to verify that the labor market is continuing to strengthen, despite the risks from abroad," Fed Chair Janet Yellen said Wednesday at a press conference.

"Such caution is appropriate, given that short-term interest rates are still near zero, which means that monetary policy has greater scope to respond to upside than to downside changes in the outlook," Yellen said.

The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December, the first rate hike in nearly a decade, marking the end of an era of extraordinary easing monetary policy.

But the turmoil in financial markets and a slowdown in global economy since the start of the year has raised increased concerns about the strength of the US economy, forcing Fed policymakers to hold off on any further rate hikes since then.

The Fed's dovish stance on Wednesday came after finance ministers and central bank governors of the G20 (Group of 20) agreed in Shanghai last month to use "all policy tools-monetary, fiscal, and structural-individually and collectively" to strengthen the global economic recovery.

David Lipton, the first deputy managing director of the International Monetary Fund (IMF), recently also called for collective action to boost the global economy as "risk of economic derailment has grown."

"I want to make the case for action now," Lipton told a conference of the National Association for Business Economics earlier this month. "Now is the time to decisively support economic activity and put the global economy on a sounder footing."

"I think the Fed probably will wait a while before raising interest rates again, that helps create a stable global environment (for China)," David Dollar, a senior fellow with the Brookings Institution and a former official of the World Bank and the US Treasury Department, told Xinhua.

The Fed's less aggressive path of rate increases could provide some relief to emerging markets who are already struggling with currency depreciation and capital outflows. It could also open a window of opportunity for emerging markets to boost economic growth.