Highlight Economic Review: Fed playing it safe

by **Cals** Sat 19 Sep 2015, 02:08

Highlight

[size=28]Economic Review: Fed playing it safe

By MIDF Amanah Investment Bank Berhad / MIDF Amanah Investment Bank Berhad

(Sept 18): Fed’s variables in being ‘data-dependent’ has officially expanded. The no lift-off decision by the Fed was due to the expected downward pressure on inflation coming from global economic and financial development. This effectively means that the Fed does take global economic and market condition into account, making it more difficult for economist to predict the Fed’s next move.

Global economy is unlikely to stabilise in 2015. Our current assessment of the global economy is that it is unlikely that it will recover in 2015. As such, if the Fed is waiting for the global economic and the financial market to stabilise, a rate hike in 2015 is improbable. However it should be noted that Yellen did say that even a rate hike in October is still possible. In our opinion the comment will only increase uncertainty in the market and making volatility to continue further.

A member of the FOMC is expecting another quantitative easing. The latest ‘dot plot’, which is the expectation of interest rate for each member of the FOMC committee, has one of the member putting his/her ‘dot’ below the 0% level, reflecting that he/she is of the opinion that further quantitative easing should is needed until 2016, in order to boost the economy. Although he/she is alone in this matter, it still reflects that one of the members is assessing that the economy will worsen in the months to come. 13 out of 17 FOMC members are expecting a rate hike this year, while 3 are expecting in 2016 and another one is in 2017. This has decreased from 15 and 2 respectively for 2015 and 2016 in June projection.

The main concern of the Fed now is inflation. By looking at the Fed’s economic projection, it could be seen that even the Fed is expecting both real GDP and unemployment rate to be better than they previously estimated in June. Indeed most economists were expecting a rate hike due to the same reason, better than expected GDP and labour market. However it seems that the Fed put a higher weight on inflation expectation in making its decision, where it lowers down its PCE inflation expectation for year 2015 from 0.7% in June to 0.4% in September.

Fed is playing it safe. Taking the position of the Fed into account, they may be of the opinion that it is better to be late in increasing the rate rather than regret an economic slowdown happens due to a rate increase. Indeed currently there is no loss to the US economy if the Fed delays the rate hike. Although theoretically too long of low interest rate could lead to a bubble, the Fed should have ample time to respond to it once symptoms of an economic bubble starts to appear.

A no lift-off is better for Emerging Market economy. In our opinion a no lift-off will be better for the emerging market’s economy as it will slow down the capital outflow process from the countries. A gradual sell-off of the emerging market’s asset will lead to a more stable currency for these countries, including Malaysia. As
previously the market had hastened their sell-off on the expectation of a September rate hike, the market should experience a small correction now.

We revise our Ringgit forecast to 4.10-4.20 for year 2015. As we are not expecting a 2015 rate hike, we revise our Ringgit forecast to 4.10-4.20 for year 2015. This is also based on the expectation that a correction will be made to both the stock and the bond market, leading to a stronger Ringgit in the next few months.
[/size]