(Newswire.net — October 28, 2015) London, London —
All Eyes on the Fed as Policymakers Gather to Announce their Decision
The Federal Reserve Bank is the most important monetary policy-making body in the world. Not only does the Fed set the tone for overall economic activity in the worlds #1 biggest economy, but it is also the benchmark against which other important monetary authorities base their decisions. For example, the Bank of England, the Bank of Canada and the European Central Bank carefully scrutinize the wording of statements released by the Fed, especially policymakers like Janet Yellen and Stanley Fischer. While the opinions of Federal Reserve Bank presidents around the country are also important, it is the chair’s word that really resonates with market participants. The last Fed decision was to leave interest rates unchanged at 0.25%, and the consensus estimate among forecasters for Wednesday, 28 October is an unchanged interest rate of 0.25%. The likelihood of a rate hike is slim to none, but that is not what market participants are really looking for – it’s the sentiment that is expressed; it’s the suggestions and opinions regarding the likelihood of a rate hike that everyone is interested in.
Why Does a Fed Rate Hike Matter?
As the world’s #1 economy, what happens in the US is important for the rest of the world. Since the dollar is primarily regarded as the world’s reserve currency (alongside the EUR, JPY and EUR), dollar strength or weakness matters. Most commodities are priced in dollars and an appreciation of the dollar is matched by an equal but opposite depreciation of other currencies. This means that as the dollar strengthens, all other currencies weaken. Against the backdrop of a massive contraction in the Chinese economy, unprecedented economic stimulus in the Eurozone (€1.1 trillion with more to come in December), and a biting recession in Japan, the IMF cautioned all central banks not to raise interest rates just yet. An interest-rate hike has a disastrous effect on the economies of EM countries. When the dollar is appreciating, money flows into the US since there is more to be gained by investing in dollar-denominated securities like CDs, Treasury notes etc.
Emerging market countries such as BRICS countries have seen massive capital outflows owing to their high volatility, poor infrastructure, and perceived weakness. We have already seen the impact of a Chinese slowdown on the production and manufacturing sectors of EM countries, and this is set to accelerate moving forward. The cross-exchange rates of a basket of EM currencies has plummeted in 2015, as evidenced by the South African Rand, Turkish lira, Brazilian real, Venezuelan Bolívar and so forth. Now there is limited anxiety as most market participants do not expect a rate hike in the US. However, that anxiety will ratchet up a notch when the Fed FOMC convenes again in December and early in 2016 when a rate hike is expected. By that stage, many analysts are also predicting that the price of Brent crude oil and WTI crude oil will also move upwards towards the $55 – $65 range. This will help to increase inflationary pressures which will all but assure market participants that a Fed rate hike will follow.
About the Author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company –InterTrader.
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