MOSCOW, October 27. /Corr. Nikita Zharkov/. Federal reserve system (FRS) that perform the functions of the Central Bank of the country, will refrain from raising benchmark interest rates at a two-day meeting on 27-28 October and will keep it at the same level of 0-0,25%, experts say. The reason is the growth of the dollar due to the easing of monetary policy in Europe and China and low inflation in the USA and the deteriorating growth prospects of the country’s GDP in the third quarter.
At the press conference of the Federal Committee on open market operations (FOMC) in September, the head of the fed Janet Yellen said that the discussion on possible increase of the basic interest rate is happening at each of these meetings, members of the FOMC. However, she stressed that the October meeting is still seen as a potential term change rates.
However, market expectations strongly disagree with the head of the U.S. Central Bank. Thus, according to the consensus forecast Bloomberg, none of the 81 surveyed economist does not expect a rate hike the October meeting of the fed.
“It is very unlikely that the fed will unexpectedly raise rates at the next meeting on October 28. Even chances of a rate increase in December over the last few weeks has declined significantly. We believe that the fed will wait to raise rates until March next year,” says chief economist at the U.S. research firm Capital Economics Paul Ashworth.
Interest rate futures show that the probability of increased interest rates this year fell to 36% against 59% in September, and the likelihood of raising rates as early as this week is only 6%.
“We do not expect the fed rate hike at the October meeting. Assume that the statement of the regulator will remain the phrase that the global economic and financial changes may constrain economic activity in the U.S. and will continue to put downward pressure on inflation in the short term. We believe that these factors will delay the initial rate hike until March of next year,” writes senior economist at Barclays Michael Gapen in the review of the Bank.
In October the IMF lowered its forecast for the pace of global economic growth by 0.2 percentage points to 3.1% in 2015 and by 0.2 percentage points to 3.6% in 2016. The forecast for the U.S. GDP growth for 2016 was lowered to 2.8% from 3%.
A mixture of internal and external factors in favour of maintaining rates
Dual mandate the fed implies that the regulator sets himself two tasks simultaneously: the maintenance of maximum employment and price stability. And if unemployment, the fed was able to cope well with /in September the unemployment rate held steady at 5.1 percent – the lowest level since April 2008/, with inflation, things are more complicated. In September in the USA and was registered deflation of 0.2% compared with August. As previously stated, Yellen before to tighten monetary policy, the fed would like to ensure that inflation is steadily moving to the target level of 2%. Now, however, the U.S. Central Bank expects that inflation will reach this target by 2018. Faster growth of inflation interfere with those of the global financial and economic changes mentioned by Yellen at the September meeting. This includes further strengthening of the dollar and slowing growth in emerging markets.
“The Outlook on foreign countries has become more uncertain due to the increased concern on the growth of the Chinese economy and other developing countries, which led to significant volatility in the financial markets. Changes from the July meeting include the fall in stock prices, a further rise in the dollar,” said Yellen at a press conference in September. According to her, these changes of conditions have somewhat tightened financial conditions in the United States. “Such changes may constrain economic activity in the US and put pressure on inflation in the short term,” added Yellen.
Back in September on the fed’s decision on rate was influenced by the risks associated with the slowdown of the Chinese economy and the negative impact of excessive strengthening of the dollar on the growth of the U.S. economy, draws the attention of the analyst “URALSIB capital” Irina Lebedeva. To date, little has changed, he said.
Only from the 15th of October, the dollar index (the value of the dollar to a basket of currencies of Euro, pound sterling, Japanese yen, Swiss franc, Swedish Krona and canadian dollar) jumped 3.5% and since early year increased by 7.9%. The rise in the dollar leading to inflation deceleration has occurred, including, due to the “flight” of investors from the Chinese stock market, and also due to the soft monetary policy of the PRC and the EU.
The Shanghai Composite index in June fell to 33% and still has not recovered. The people’s Bank of China against this background, continued to cut rates. In particular, on 23 October, China’s Central Bank once again lowered interest rates on one-year loans of up to 0.25 percentage points to 4.35%.
Another impetus to the growth of the dollar was due to the depreciation of the Euro after the ECB President Mario Draghi last week declared his readiness to expand in December the asset purchase program to enhance the effect of the monetary stimulus. “The possibility of expanding the asset purchase program by the ECB last week has caused a new wave of strengthening of dollar to Euro”, – said Irina Lebedeva. From 15 October the Euro/dollar fell by 4% to $1,1 for Euro – at least two months.
“Against the background of global monetary easing the likelihood of a rate hike by the Fed is extremely small. In these circumstances, special importance will have the data on U.S. GDP for the third quarter. According to forecasts, the growth rate will decrease by more than two times compared to the second quarter and will amount to only 1.5% in annual terms,” – said the chief strategist at Sberbank CIB market currencies and interest rates, Tom Levinson.
The influence of external factors on the growth of the dollar leads not only to slow inflation but also to lower exports to the United States, which in turn puts pressure on GDP growth of the country. Assessment on the dynamics of the US GDP for the third quarter will be published on 29 October – the day after the fed’s decision on rate. Experts already are predicting lower growth due to lower exports and industrial stocks.
Barclays estimate also assumes that U.S. GDP growth in the third quarter will slow to 1.5%, against a growth of 3.9% in the previous quarter. “We believe that the increase in the trade deficit will reduce GDP growth by 0.7% points, while the slowdown in inventory subtract from GDP growth of 1.4 additional percentage points,” predicts Michael Gapen from Barclays.
In August, the deficit on the US trade balance for the month jumped by 15.6% to 48,33 billion when analysts by Bloomberg at the level of 48 billion dollars. In addition, inventory, which is one of the components of GDP, in August, showed zero growth during the month against the expectations of growth by 0.1%.
The period of difficult decisions for the fed
In December 2008, the us regulator has lowered the rate almost to zero and stores it in the range of 0-0. 25% for almost seven years. Cheap money helped the U.S. market to significantly recover from the global economic crisis, which creates conditions for increasing interest rates. The unemployment rate fell from 10% in 2009 to 5.1% in September, while GDP in the second quarter of 2015 increased in annual terms by 3.9% against a fall of 4.1% in the second quarter of 2009.
Low rates and QE worked well in the U.S. since the beginning of the crisis, but now there are enough serious concerns about the exit from low policy rates, says a senior strategist at Sberbank CIB Vladimir Pantyushin. “Now a protracted process of raising interest rates the Federal reserve is because the question arises, what effect on the U.S. economy will have an exit program low rates. While concerns are serious enough, otherwise the fed last year began to raise rates,” said the strategist.
The opinion of market participants and economists about the timing of the first fed rate hike since last year varied from meeting to meeting. In particular, in mid-2014, investors and experts on average were expecting a rate hike in the first half of 2015. Then in March of this year expectations have moved to June and in June – by September. Now, according to Bloomberg, traders are laying 60 per cent probability of a rate hike at the March fed meeting in 2016.
“The fed so long hesitated to take a step forward that missed the opportunity to normalize monetary policy. Why now try to surprise the market step that could lead to its collapse? Moreover, inflationary expectations are reduced, and the prospects for the world economy remain uncertain no less than in September”, – the analyst on macroeconomic policies at the global markets “VTB Capital” Neil McKinnon.
The former head of the Federal reserve Ben Bernanke said in an interview with CNN that Janet Yellen “will have several difficult decisions”. According to him, the US economy in the last time “strong enough”. In particular, Bernanke drew attention to the improvement of statistics in the real estate market, car sales and household spending. However, in his opinion, Yellen will have to consider the weakness of the emerging economies, including China.
The growth rate of China’s economy, in January-September slowed to 6.9% against growth of 7.4% for the same period last year. This slow growth in China has not been since 2009.