The United States Federal Reserve Board will convene a monetary policy meeting on Jan. 26-27 and release the latest resolution. The market expects that as global financial market and U.S. economic data fluctuate, Fed will soften its stance on tightening monetary policy and delay the next rates hike.
Since the beginning of the year, the global financial market tumbled. Global indexes of various institutions indicated that global stock markets have declined by 20 percent from the peak of last year, and entered bearish market technically. Investors concern that as downside pressure on emerging markets increases and collapse of crude oil led global stock markets down, the U.S. financial market and economic recovery may meet roadblock.
Ease monetary policies implemented by central banks of other countries also pressure on Fed’s tightening pace. Over last week, the European Central Bank and the central bank of Japan indicated that they will further ease monetary policies to cope with sluggish economic growth. These official voices revealed governments’ decisions to pull up the economy. However, economists are in the view that divergences on monetary policies between central banks are worsening the current global financial market turbulences. They call on Fed to slow down or even halt the tightening.
Market participants’ appeal that Fed should weaken its attitude towards further rates hike is a kind of support to the tumbling market. Fed decision makers have been indicating that the policy making is not contradicted with stock prices. But in most of the time over the past seven years, Fed has supported the market by maintaining low interest rates and injecting capitals through assets acquisition.
Since the rates hike in December last year for the first time in a decade, Fed has implied that there may be four rates hikes in 2016. The Fed policymaking committee will soon hold the first meeting of the year, and release follow-up statements on Jan.27. The British Financial Times published an article, which said it expected that Fed is likely to show a mild stance, aiming to attract long position buyers back to the stock market.
“[Fed’s] compromise on the course of rates hike may provide a turning point for the market,” said Walter A. “Bucky” Hellwig, vice president of BB&T Wealth.
The recent fluctuations of a series of important economic data of the U.S., especially key indicators related to inflation and employment, also assured market participants’ judgment that Fed will delay rates hikes. Reuters’ article indicated that the change of economic outlook will, according to the expectation of investors, push off next fed rates hike from April to June, which means that the frequency will be just half times as that estimated by Fed officials last December.
U.S. consumer prices unexpectedly fell in December as the cost of energy products and food declined. In addition, a drop in housing starts and building permits last month, adding to weak reports on retail sales, industrial production, exports, inventory and manufacturing surveys that have suggested a significant slowdown in economic growth at the end of 2015
Against the backdrop of renewed weakness in oil prices, economists say the expected reversion to the Fed's 2 percent inflation target is slowing. "The broad-based nature of the decline in inflation will hardly be encouraging news at the Fed, and if anything it is likely to temper their confidence in the outlook for inflation," said Millan Mulraine, deputy chief economist at TD Securities in New York.
Market-based measures of Fed policy expectations assigned a probability of 29 percent to the central bank's raising rates at the March 15-16 meeting, according to the CME Group's FedWatch program.
The latest employment report shows that non-agricultural job growth of slightly lower than 300,000 were added last December, and the data on the number of jobs increased for the previous two months were also higher than reported.
The pace of employment growth plays a big part in Fed’s decision on rates hike. Officials estimated that as the economy is nearing full employment, the pace of job growth may slow down. Currently, the U.S. employment rate is 5 percent, the lowest in seven and a half years. Fed officials have attempted to popularize such a view, namely an increase of 100,000 jobs can keep pace with population growth, and let unused labor forces to flow back to job market.
Fed’s tightening monetary policy place emerging economies in an awkward position where capitals flow out and currencies devaluate. Authorities of emerging markets are forced to plan or take measures to offset negative impacts result from Fed rates increase.
Statistics from Institute of International Finance show that capital outflow of emerging markets has hit the record high of 732 billion dollars in 2015. Meanwhile, according to resources from Ashmore Group, an investment management institution, currencies of emerging markets dropped 17.6 percent against dollar on average in 2015, and this trend shows no signs to take the edge off. Last week, Russian ruble, Mexican peso and Colombian peso all weakened to record low against dollar. In the first two weeks in 2016, currencies of emerging markets have accumulated depreciation of 3 percent. India, Venezuela and Egypt implemented some kind of capital control in response to currency devaluation.
In the latest guidance on capital control, IMF pointed out that destructive capital outflow can lead to foreign reserve loss, local currency devaluation, increase of pressure on financial system and economic production value decline. IMF said that in crisis situation, capital control measures may help to avoid drastic depreciation of local currency and sharp decline of foreign reserve.
Tranlsated by Adam Zhang
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