Fed move signals US rate hike in Dec – Tetangco


BY KEEPING the yield rate steady in the US during its policy meeting this week, the Federal Reserve has conveyed a clearer signal that a rate lift off is in the offing in the world’s largest economy come December.

The Bangko Sentral ng Pilipinas (BSP) said the latest Fed move was expected in light of the US presidential race and the need for the US central bank to take into consideration more economic date in making the decision later this year.

From the private sector perspective the timing would be auspiciously in line with traditions.

“If the US election is settled without much fanfare and fireworks, the Fed is heavily expected to enact what has fast become a Christmas tradition: hike rates in December. For months, Janet Yellen and company have battled the twin bugs of deflation and labor market slack,” said BPI Associate Economist Nicholas Antonio Mapa said.

On Wednesday (US time), the US Federal Reserve announced the decision to hold off any rate hike for November. Instead, it would “wait for some further evidence of continued progress” of the US economy before raising the federal funds rate.

BSP Governor Amando Tetangco said the Fed move was no surprise considering the tension surrounding the US presidential elections called for nothing less than a status quo in monetary policy as doing otherwise could further destabilize the already volatile financial markets.

He said this would likely put the potential December rate hike to lower levels, indicating minute adjustments in local and global rates.

“The Fed action is as expected, especially before the US elections. Analysts are parsing the statement and focusing on the word “some.” Analysts say the Fed may have set the bar low for a December move. So if that move does materialize, then it wouldn’t come as a surprise to the market,” Tetangco said in a text message to reporters on Thursday.

“That said there is a lot to watch out for in the next week. And it’s not likely that markets would make large movements in the meantime. We will continue to monitor developments, both external and domestic, and consider these in our own policy assessment at our meeting next week,” he added.

The Fed noted that job gains have been solid, while household spending has been rising moderately and inflation somewhat increased even if below the 2 percent target. On the other hand, fixed investment by businesses remained soft.

“Against this backdrop, the committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent,” the Fed said in a November 2 statement.

Despite slight improvements across economic indicators, the US Fed said its mandate to “foster maximum employment and price stability” is still of utmost concern. It will assess the economic factors—what has so far been realized and can still be expected—in determining the timing and size of future yield rate adjustments.

With this is mind, Mapa said a December rate hike may be well in order as inflation is approaching the Fed’s 2 percent objective while maintaining improvements in the labor market.

“With inflation finally approaching the Fed’s objective, all the while maintaining the pace of improvement on the labor front, a December rate hike may indeed be in order. That is of course if the US election goes smoothly.

Remember that the last time the Fed paused before a major political event, Britain decided to leave the European Union. 2016 has truly been the year of Stranger Things,” he said.

The US non-farm payroll for October and the Philippine inflation figures are both set to be released today, November 4.


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