US Fed raises key rate to 1.0-1.25%, signals one more hike in 2017

WASHINGTON, United States — The US Federal Reserve raised its benchmark interest rate by a quarter point to 1.0-1.25 percent on Wednesday and signaled another increase remains likely this year, despite the recent spate of weak economic data.

In explaining this second rate hike of 2017 and plans for more increases in the coming months, Federal Reserve Chair Janet Yellen said the move reflected the progress in the world’s largest economy, which continues to add jobs at a solid pace.

“The economy is doing well, is showing resilience,” Yellen said in her quarterly press conference.

“We have a very strong labor market, an unemployment rate that’s declined to levels we have not seen since 2001. And even with some moderation in the pace of job growth, we have a labor market that continues to strengthen.”

And despite recent tepid price pressures, the Fed expects inflation to pick up — eventually, citing “one-off reductions” in certain categories such as cell phone services and prescription drugs as the reason for the recent lower readings.

Those factors mean the Fed’s preferred inflation measure will remain below the two percent target for some time, but will gradually rise to the target level over “the medium term.”

But coming on a day when the consumer price index and retail sales fell, in large part due to falling food and gasoline prices, but with widespread declines in other categories, some economists are saying the Fed is no longer basing its decision on the data, as it has repeatedly said.

“The third rate hike in seven months, coming not long after a relatively poor Q1 GDP print, suggests the Fed has become less data-dependent in its monetary policy decisions,” Fitch Ratings Chief Economist Brian Coulton said.

One FOMC member, Minneapolis Federal Reserve Bank President Neel Kashkari, dissented from the decision, preferring to keep policy on hold for now.
Third hike coming?

Analysts in recent weeks have become increasingly doubtful there would be a third rate increase later this year, as inflation, consumption and other economic data have indicated the weakness seen in the first quarter has continued.

Fed futures markets now put the chances for another rate increase this year to below 50 percent.

Chris Low of FTN Financial said the Fed “compromised” by continuing the rate increases despite falling inflation, but “the market expects the Fed to take a break.”

However, Yellen said business and household confidence remain quite strong, and echoed the statement from the Fed’s policy-setting Federal Open Market Committee, which repeated its confidence that the economy will continue to expand “at a moderate pace” even with further gradual rate increases.

Asked about the criticism, Yellen said, “I don’t think …the Fed’s credibility has been impaired.”

She once again said the path of interest rates “is not a pre-set course,” but the Fed’s quarterly projections show they still anticipate making a third rate increase this year, with the median federal funds rate ending 2017 at 1.4 percent.

That would be followed by three rate increases in 2018 and three more in 2019, with the key rate at 2.9 percent by the end of that period.
Forecasts

In their quarterly projections, Fed officials saw the economy growing slightly faster than previously forecast, with GDP up 2.2 percent this year, a tenth of a percentage point higher than forecast in March.

But the estimate for the central bank’s preferred measure of inflation, the PCE price index, was cut three-tenths to 1.6 percent, while the core PCE, which excludes volatile food and energy prices, was cut two-tenths to 1.7 percent, according to the Summary of Economic Projections.

The Fed now sees the unemployment rate ending the year at 4.3 percent, where it sits currently, rather than the 4.5 percent previously expected.

The central bank also confirmed that it will begin later this year to implement a plan to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.

As long as the economy “evolves broadly as expected,” the plan “would gradually reduce the Federal Reserve’s securities holdings,” the FOMC statement said. CBB

source: business.inquirer.net

Indonesia hikes rates, other Asia-Pacific central banks hold before Fed

Jakarta/Wellington — Bracing for more turmoil if the US Federal Reserve scales back its economic stimulus next week, Indonesia hiked interest rates to shore up its ailing currency, but elsewhere in Asia-Pacific policymakers less afraid of capital outflows held steady.

Bank Indonesia's surprise increase in three key rates on Thursday helped the rupiah bounce off a 4-1/2 year low, but it is still Asia's worst performing currency so far this year, having lost around 15 percent of its value against the dollar.

Having come through the past few months of a fierce emerging markets sell-off largely unscathed, New Zealand, South Korea and the Philippines all left rates unchanged as expected, though they are at different stages of their economic cycles.

The Fed is widely expected to announce a reduction in its quantitative easing on Sept. 18, to start bringing the curtain down on nearly five years of super-easy dollars.

Investors have been expecting the move for months, so the impact on markets should be less when it happens.

"Is the emerging market sell-off over? Likely not," said a recent research note by Credit Agricole, though it added that the pressure may moderate as US bond yields rise at a slower pace and as economic recoveries in the US and Europe support exports from emerging economies.

While emerging markets have taken a beating in the last few months, some have since steadied. But others like Indonesia and India, dependent on capital inflows to fund large current account deficits, remain vulnerable to further capital outflows.

"We believe that the current bout of currency volatility is nearing an end and that a prolonged reversal of capital flows is unlikely. As such, we think further aggressive rate hikes in Indonesia will be unnecessary," said Gareth Leather, economist at Capital Economics Asia.

"Nevertheless, uncertainty about the timing of eventual policy tightening by the (US) Fed could trigger further bouts of volatility, prompting further rate hikes in Indonesia."

The majority of economists polled by Reuters had expected BI to hold rates. In the event, it pushed up its benchmark rate by 25 basis points to 7.25 percent.

The central bank said the moves were designed to dampen inflation, bolster the currency and ensure its current account deficit was at a sustainable level.

Bank Indonesia has now hiked its benchmark rate by a total of 150 basis points in a series of increases since June, when the exodus from emerging markets gathered critical mass.

BI also lowered its forecast for growth this and next year to 5.5-5.9 percent and 5.8-6.2 percent, respectively.

A current account deficit equivalent to 4.4 percent of gross domestic product, and inflation surging to almost 9 percent has drained investors' confidence in Southeast Asia's biggest economy.

India is in a similar fix, only with weaker economic growth. Reluctant to raise interest rates that could exacerbate the economic slowdown and drive up the cost of government borrowing, the Reserve Bank of India has delayed its policy meeting until two days after the Fed meets.

New Zealand hawkish for 2014

How the Fed sequences the winding down of its quantitative easing program will set the rhythm for other global central banks as they juggle the objectives of supporting growth, controlling inflation and maintaining financial stability.

"Growth expectations have been revised down for India, emerging Asia and Brazil as their monetary policy will have to be tighter than would have been the case if there had been a more gradual market adjustment to the Fed's planned moves," Alan Oster, group chief economist at National Australia Bank in Melbourne.

"Fortunately, Chinese growth has held up and its economy is one-and-a-half times the size of India, Brazil and Indonesia combined."

Worries over whether the conflict in Syria will spread, lighting a fire under oil prices, are also out there.

"How events unfold over the coming weeks could significantly change the global environment," the Reserve Bank of New Zealand (RBNZ) warned in its monetary policy statement.

The central bank sounded a surprisingly hawkish note on its outlook for rates, signaling they would start to rise by mid-2014 and sending the domestic currency to a four-week high.

Announcing it was keeping its official cash rate at a record-low 2.5 percent, RBNZ also raised its outlook for 90-day bank bill rates to 3.0 percent in the June 2014 quarter, indicating that rates may rise by 25 basis points by that time. That is sooner that it suggested in its previous statement.

"(Official cash rate) increases will likely be required next year," RBNZ Governor Graeme Wheeler said in a statement, repeating his pledge to keep rates unchanged in 2013.

He added that US Fed tapering could take off some upward pressure in the New Zealand dollar, which hit a post-float high against a currency basket earlier this year.

New Zealand also has a current account deficit, but it has a sound credit rating, inflation at 0.7 percent is a 14-year-low, and its economy is regarded as fairly resilient.

Korea, Philippines steady 

At 2.5 percent, the base rate in South Korea is near a record low, and the central bank's decision to maintain its easy monetary policy was expected as it has been supporting the government's fiscal stimulus.

Rock steady on Thursday, the Korean won has lost just 1 percent of its value against the dollar this year, giving the central bank confidence that the country's highly open capital markets can weather whatever the Fed does.

Asia's fourth-largest economy grew by a modest 1.1 percent in the second quarter from the preceding quarter, the fastest growth the export-focused economy has shown in more than two years, and inflation is below target.

"The Committee expects that the domestic economy will maintain a negative output gap for a considerable time going forward, although it forecasts that the gap will gradually narrow," the Bank of Korea said in its policy statement.

Also keeping its rates on hold, the Philippines central bank said it expects inflation to remain subdued into 2014, despite the peso's declines and pressure from volatile oil prices.

Most economists see the central bank holding rates for the rest of the year, with economic growth expected to hit around 7 percent this year.

"The economy does not need additional support for now," said Jose Mario Cuyegkeng, economist at ING Bank in Manila. — Reuters

source: gmanetwork.com

European shares near 6-week lows before pivotal US data

London — European shares steadied around six-week lows on Friday pending jobs data which will give the latest clues on whether the US economy is strong enough to warrant an easing of equity-friendly stimulus.

After a year-long rally fueled by global central bank support, equity markets are getting increasingly concerned that the policy cycle could be turning, with the European Central Bank this week saying it is in no rush to launch fresh measures, while US Federal Reserve officials openly discuss when would be the right time to start scaling back quantitative easing.

The creation of more than the expected 170,000 US jobs in May could therefore provide the catalyst for stock market declines, while a very weak number may be a positive.

With so much riding on the data, investors were unwilling to move the market too far in either direction. The FTSEurofirst 300 was down 0.1 percent at 1,176.94 points at 1002 GMT after a volatile morning when it darted either side of the no-change line and held around six-week lows.

"The markets are quite nervous about it ... They need reassurance about QE to be stable, so a strong number would cause a disruption," said Hans Peterson, global head of investment strategy at SEB Private Banking.

Analysts at Bank of America Merrill Lynch estimate that payrolls would have to rise by over 250,000, followed by an eventual second quarter gross domestic product reading showing growth of around 3.5 percent, to spark an unwinding of QE as soon as September. In contrast, readings below 90,000 could pave the way for more stimulus.

"Over the very short run there might be some relief but the general theme is that ... we seem to be losing our mantra that central banks will help us all the way," said Gerhard Schwarz, head of equity strategy at Baader Bank, forecasting a correction of 10 percent or more into the third quarter.

SEB's Peterson said for a fresh leg higher, the market would need to shift from being supported by central bank stimulus to finding comfort in improving economic fundamentals - a shift from the current stance when bad data is 'good' for stocks:

"The market has to mature into a new trend and that mindset change will take time ... It's time be a bit more conservative."

Reflecting the more cautious mood, Thomson Reuters Lipper data showed U.S.-based funds pulling money out of European equities for a second week in a row, with an outflow of some $1.8 billion - the biggest weekly drain since late 2011. — VS, GMA News

source: gmanetwork.com

European stocks claw back ground as markets steady

London — European stocks, bonds and the dollar traded in a calmer fashion on Monday after last week's turbulence, though another three percent dive in Japan's Nikkei kept investors on edge.

Last week's shakeout of equity, bond and currency markets was triggered by concerns the US Federal Reserve could wind in its support sooner that had been expected, weak China data and doubts over how low Japan will allow the yen to go.

With UK and US markets both closed for public holidays, European equity and bond markets saw a quieter than usual start to the week.

The FTSEurofirst 300 index of top European shares started up 0.3 percent as last week's falls tempted buyers, while demand for safe-haven 10-year German government bond futures eased.

The dollar was also steadier, though it dipped to 101.00 against the yen as the latest steep fall in Japanese equities saw investors continue to unwind their dollar hedges and head for bonds. The euro was little changed at $1.2940.

"Markets are currently experiencing difficulty fully and precisely understanding both the pace of global growth and the implications of central banks' activism," Credit Agricole said in a note.

"Expectations cannot remain stable for long and so investors should be prepared for periods of higher volatility in particular asset classes," they added.

In commodity markets, Brent crude slipped towards $102 per barrel, extending last week's 2 percent drop, as a weak economic outlook in a well-supplied market pressured prices. The broader market nerves also helped gold firm as it looked to build on last week's best run in a month. — Reuters

 

source: gmanetwork.com