What to expect from the fed, or the Economic affair of year

What to expect from the fed, or the Economic affair of year

The fed may for the first time in nearly 10 years to increase the base rate. The decision can be taken at the meeting to be held December 15-16.

MOSCOW, 16 Dec. Another two-day meeting of the U.S. Federal reserve, which will decide on further monetary policy of the country, takes place on 15-16 December. The decision of the regulator is one of the main intrigues this week and even year. About 97% of the experts polled by The Wall Street Journal, believe that the first in nearly 10 years, the rate increase will occur at this meeting. However, there are 3% of optimists among analysts, who are hoping that the regulator will take the beginning of the cycle to normalize monetary policy in March 2016.

Regarding the impact on the Russian economy, the head of the CBR Elvira Nabiullina expressed recently opinion that the discrepancy between market expectations and actual policy of the fed raising rates could create risks of capital outflow from emerging markets, which include Russia, and the increased volatility not only in this, but at least next year. She also noted that under the influence of external negative factors there is a high volatility of the ruble.

The fed last raised the base rate 29 June 2006. In 2007-2008, the regulator gradually reduced rate until, until it reached the lowest level of 0-0. 25% in December 2008. Low interest rate, according to the expectation of the regulator that was supposed to stimulate production, to send money to the real sector of the economy and help the U.S. recover from the crisis.

And wants and prickly

The December meeting is not the first in recent times, when expectations of a rate hike reach nearly 100%. But the difference this time from past may be that previous expectations have not justified.

Since 2011 the fed in their statements said will not raise rates at least until mid-2013, and then extended this period up to mid-2015 due to the uncertain recovery of the U.S. economy. And here from the middle of this year, from time to time, investors expect that the increase will finally happen, and it will save the markets from still-looming uncertainty. Last summer the market was almost completely confident that the fed will make this move, but the regulator came to the conclusion that the economy is not yet ready for it and even worth the wait.

At the same time, the head of the regulator Janet Yellen and other fed officials have repeatedly said their intention to increase the benchmark interest rate in 2015. According to Yellen, if the economy continues to grow, economic conditions allow the regulator to raise rates and start to normalize monetary policy.

“Given recent comments by Janet Yellen and Vice Chairman of the fed Stanley Fischer on how much improved the state of the economy, labour market and earnings, not to increase the rate in December will amount to misinformation,” — says economist of Economic Outlook Group Bernard Baumol LLC (Bernard Baumohl).

But what about the markets

At the same time previous to its meeting the regulator in the hope to prepare markets for the upcoming action noted that the rate of increase in base rates in the US will not be sharp, they will be smooth and gradual. From this, many economists have made the following forecasts: the fed will increase rates in December, in January 2016 to change her will, but in March of next year may be the second stage of the normalization of monetary policy in the United States.

“The fed will be very careful,” says chief economist of the American Chemistry Council Thomas swift (Thomas K. Swift), saying that the regulator is trying to think through the consequences of this step for stock, currency and commodity markets.

To date, because of the uncertainty about the prospects for monetary policy of the US volatility in global financial markets has greatly increased. Many investors try to win back the inevitable future increase, selling shares and refraining from new market positions. Against this background, periodically there is a decrease in the stock markets, a rising dollar and cheaper commodities like oil and gold.

“Many investors in the market have not lived in the conditions of increasing rates, and it only increases the chances of increased volatility in the markets next year,” says Executive Director of the trade Department, Mitsubishi UFJ Securities (USA), Thomas Roth (Thomas Roth).

And at the same time, there are some experts who claim that if the regulator this time will refrain from raising rates, this could potentially cause a sell-off in the markets. The fact is that investors can assume that if the fed refuses, then the state of the American and world economy is not as rosy as they say representatives of the regulator and stats.

The reaction of world markets

Increased volatility in the case of a base rate increase in the USA may very well affect several of the world’s economies. In particular, the risk for the European economy, where the ECB follows the fed is the opposite strategy: he follows the path of easing, not tightening monetary policy. And according to some experts, the volatility in global financial markets may exert pressure on the recovery of the Eurozone economy.

At the same time, many experts are of the opinion that the Bank of England may follow suit and become the second Central Bank after the Federal reserve’s raising the stakes. Historically, rates the US and the UK, whose economy is showing signs of stability, change in tandem.

Not too good may be the situation for emerging markets. Thus, according to the international rating Agency Moody’s, the interest rate hike in the U.S. may constitute a risk to the number of such countries. “Although a rate increase eliminating an element of uncertainty for developing countries, still some of them may experience capital outflows and pressure on investor sentiment,” wrote the Agency in its review.

Among the markets that are most exposed to risk by step by the fed, Moody’s notes such large developing countries as Brazil, Turkey, South Africa and Russia.