THE United States Federal Reserve’s decision on Wednesday (Thursday in the Philippines) to keep interest rates unchanged is expected to give some fresh energy to the Philippine financial markets.
The stock market welcomed the news, driving the benchmark PSEi up 0.84 percent or 62.82 points. That’s a bigger increase than the previous day’s 0.56 percent or 41.53 points. During the height of trading, the index hit 7,577 points but later eased to close at 7,564.47.
In the US, the market reaction was moderate. The dollar eased 0.2 percent to $1.1265 against the euro, and US Treasury bond yields edged lower, the 10-year bond falling to 1.60 percent from 1.61 percent.
According to market watchers in Manila, the Fed’s latest move and dovish statement could support a stronger Philippine peso.
The Fed standing pat on rates was expected, said BSP Governor Amando Tetangco Jr., but he added that the policy path chart reflecting “a more dovish stance was new.”
The Fed’s decision as well as the liquidity forecasting for the succeeding term deposit facility (TDF) auctions will be discussed at the Monetary Board (MB) meeting on the June 23.
Meanwhile, in the second half of this year, the Fed is likely to raise the rate twice to near 1.0 percent. This possibility has been indicated by the US Federal Open Market Committee (FOMC) that deliberates on interest rate adjustment.
There were various factors for the Fed that has been pondering over the question of rate adjustment for some time to decide now to maintain status quo. Most critical of them was the referendum that Britain will hold on June 23 on its partnership in the European Union.
According to the French news agency, AFP, Fed Chair Janet Yellen said the referendum was an important factor in the Fed keeping monetary policy on hold.
“Clearly, this is very important decision for the United Kingdom and for Europe” and it could have consequences for economic and financial conditions in global financial markets, she said in a news conference at the end of a two-day meeting of the FOMC.
FOMC members had also weighed on the decision. At its latest meeting, six FOMC members forecast just one rate hike this year whereas only one had felt so in March.
Nonetheless, the Fed did not escape criticism for keeping the rates low.
“There is a very dangerous scenario building up in the US because the rates are so low and for so long,” Robert Heller, who was on the Fed’s board of governors from 1986 to 1989, told CNBC.
“Pension funds and insurance companies will sooner or later have a very hard time fulfilling their obligations and that would be definitely triggering the next recession,” he added.
However, the FOMC did not seem to be as worried. Amid the uncertainties on the international scene and the May employment stall in the US, the FOMC has lowered its forecast for US growth to 2.0 percent for this year and sees that same tepid pace holding through 2018. It also stayed with its forecast that inflation will rise to its target of 2.0 percent “over the medium term.” The policy panel also remained confident that hiring would resume at a solid pace and inflation will pick up.
Before the FOMC meeting some analysts had expected that the Fed might turn much more dovish on its inflation and rate expectations after the downturn in the employment market in May, when the number of jobs added to the economy fell to the lowest level in nearly six years. But the FOMC policy statement was more neutral, analysts said. And they were divided about what it means for the outlook.
Ian Shepherdson of Pantheon Macroeconomics said he expects the Fed to wait through July to confirm the economy’s strength, and that data will support a rate increase in September.
Meanwhile, the BSP chief expects the financial markets to remain “steady to higher.”
There are also domestic factors that market participants will be looking at in the different markets, he added.
According to Nicholas Antonio Mapa, the associate economist at the Bank of the Philippine Islands, the peso could now appreciate as long as the current Fed rate holds. But the situation could reverse when the Fed hikes the rate later in the year.