Operations Committee on the open market (FOMC) U.S. Federal reserve at the meeting on 14 December raised its key interest rate to 0.5, 0.75%, follows from data on the regulator’s website. The decision was consistent with the expectations of the global financial market.
The last time the Committee had raised the rate at the end of last year amid improving economic indicators. The decision to increase rates this year the fed has taken on the basis of positive data on the labor market and inflation. “In recent months there has been a steady growth of employment and reduction in the proportion unemployed”, — said in the comments of the regulator.
The regulator was sufficient grounds for a rate hike, say the experts interviewed. Revised data on the US GDP growth for the third quarter showed improvement to 3.2%, compared with a preliminary estimate at the level of 2.9% and, as noted by the Wall Street Journal, exceeded market expectations by 0.2 percentage points Unemployment in November fell to 4.6 percent — a nine-year low.
The fed has not stopped even by low inflation, which has not yet reached the target level of 2%, says analyst “Discovery Broker” Andrei Kochetkov. “If we consider the statements made by the fed within two to three years, she had to raise rates only if inflation will reach 2.5%. In October she was at 1.6% at the 2 percent target. However, the regulator believes that inflation expectations increase and prices will rise faster than forecast. Naturally, he expects to be proactive,” — said the expert. The Financial Advisor predicts that in the first quarter of 2017, inflation will exceed the target.
The Committee stressed that it will continue to increase the rate in 2017. The fed plans to do this three times — each time by 25 b.p. — then in September he intended to raise in 2017, twice.
The fed significantly improved the Outlook for GDP, unemployment and inflation. According to the regulator of the American economy in 2016 will grow by 1.9%, in 2017 — by 2.1%. Unemployment in 2017 is estimated at 4.5%.
Under the veil of uncertainty
Yellen, commenting on the Outlook for the economy at a press conference that was broadcast on the website of the Federal reserve, said that at the meeting the Committee members discussed the election of Donald trump for President of the United States and the question of how proposed policies may affect the us economy. According to her, changes in fiscal policy related to his election and in the future could affect the fed’s forecast, but to talk about it now, though “some members of the Committee — but not all — do have taken into account the preconditions regarding fiscal policy, in their forecasts”.
Fed believes that market developments, including share price growth, rising long-term interest rates and the appreciation of the dollar suggests that “the markets expect the expansionary monetary policy in which the level of interest rates in the US compared to the rest of the world would have increased”. At the same time, she said, the market is uncertainty, and the situation for them will change as events unfold.
“All members of the Committee recognize that there are serious uncertainties about how it can change the economic course and how it will affect the economy, — said Yellen. — Now we work under the veil of uncertainty”.
A negative surprise
Since the announcement of the decision to raise rates Brent crude fell by 23:30 1.8%, to $53,84 per barrel. The ruble weakened against the dollar by 1%, to 61.5 per dollar.
The reaction of the markets will depend not on the rate hike, as investors were expecting and laid this factor in quotes, and from the accompanying comments from the fed, including the official statement of the Committee on open market operations, projections and press conference by Janet Yellen, say experts interviewed.
The rhetoric of the fed was tougher than expected market, counting on a more gradual tightening of American monetary policy, said the chief economist, head of the center for macroeconomic analysis of Alfa-Bank Natalya Orlova. “Plans for a threefold increase in rates in 2017, especially given the election of President Donald trump, promising to soften the budget policy, sounds like a serious threat for the markets. I believe that this is a negative surprise, including for the Russian currency,” she says.
Chief economist of “Renaissance Capital” in Russia and the CIS Oleg Kuzmin, in turn, says that if market participants will hear signals over an expedited rate increase, it may be regarded as a toughening of the positions of the fed and, therefore, lead to further strengthening of the dollar, which will create additional risks for the ruble.
Another interviewee, a representative of a major management company, in contrast, believes that a three-fold increase in rates will not have a serious pressure on the Russian currency in the long term. “It’s not the fastest pace of rate hikes, given the fact that they are at historically low levels. A couple of the ruble/dollar impact of price quotations for raw materials, especially oil. The rise in U.S. interest rates provides a greater dollar’s attractiveness and, consequently, lower commodity prices — which we have seen,” he says. The source believes that the initial reaction of the ruble will moderately negative — the ruble may weaken to 1.5–2%, but it will be short and will not accept a large scale.