Fed Completes QE Tapering
- The FOMC decided to conclude its remaining asset purchase of US$15bn/mth under QE3. Meanwhile, the FOMC reiterated that current low Fed Fund Rate will be maintained for a considerable time.
- Comparing the current FOMC statement with the one issued last month, we sense that the Fed has turned slightly hawkish and is unfazed by the recent volatility in the financial markets.
- The FOMC brushed off market concerns about (i) disinflation risk due to lower energy prices and (ii) negative spillovers from weakness in other major economies (i.e. Euro area & China).
- We expect the US economy to grow near its 3% par level in 2015, with a pick-up in consumer spending on the back of further labour market improvement and higher purchasing power (lower energy price & strong US$).
- We expect the Fed to stick to its rate hike plan, with first rise in Jul-2015.
- We expect US$ to maintain its strength into 2015, which will continue to pressure other major and EM currencies as well as global commodity pricing. In this regard, we expect MYR to remain weak, ranging RM3.25-3.30/US$ in 4Q14 and RM3.25-3.35/US$ in 2015. More moderate growth outlook, smaller current account surplus and a pause in the OPR will also curb upside of MYR.
- source: HLIB
REUTERS: Saying QE is over is a bit like saying a flood is over when the water, up to your chin, stops rising.
The Fed which, as expected, pulled the trigger on the final taper on Wednesday, still controls a balance sheet it plans to keep steady at US$4.5tril.
And more to the point, though the statement included a bit of upbeat talk about employment, we are now looking at forward guidance of a wait of a "considerable time" before interest rates might actually rise.
There can be little doubt that the US economy is now receiving very intensive support from monetary policy, both through the balance sheet, which remains massive, and interest rates, which remain pinned near the zero lower bound.
If we take the end of the taper as predetermined, and think of how shocking it would have been had they not done this, then really all we are dealing with here is changes in tone and emphasis from the Fed.
To be sure, the statement is slightly more upbeat, both in terms of the labour market and by minimising fear that inflation will remain below the 2% target. There really isn't all that much to go on here, and we are going to remain in this situation conceivably for many months, trading off on changes in forward guidance.
The Fed had it both ways in the statement: "In determining how long to maintain this target range, the Committee will assess progress, both realised and expected, towards its objectives of maximum employment and 2% inflation," the FOMC said in explaining the decision.
Totally unsurprisingly, this cuts both ways in that they may move more quickly or slowly depending on what they experience.
Remember, forward guidance is a promise, but the Janet Yellen who makes the promise is not the same Janet Yellen who will be called on to deliver on it. Besides higher volatility, one worry is that forward guidance loses its efficacy the longer it gets used.
I think it’s fair to expect turbulence under these circumstances, almost regardless of what we see by way of economic data, good or bad. The market is going to have a hard time digesting the news of the next six months and should see more sharp moves.
AN INTERVENTION FROM THE 'MAESTRO'
That brings us to Alan Greenspan, who somehow had the temerity to weigh in on Fed Day with a warning about the troubled times to come.
Hearing from Alan Greenspan on Fed Day, the man who bears as much responsibility as anyone for our current plight, is about as welcome as a Public Service Announcement from the Pied Piper on Mother's Day.
Greenspan not only said that "Effective demand is dead in the water," he went on to point out that the bond-buying programme boosted asset prices but did little to boost the real economy. The former Fed chairman contrasted the "terrific success" of bond-buying in raising asset prices with the way in which it "has not worked" for the real economy.
It is a sad and ironic day when I find myself in full agreement with Alan Greenspan.
It is going to be fearsomely difficult to raise interest rates, much less start to divest the assets on the balance sheet, without disrupting financial markets. Markets will become hypersensitive to Fed tea-leaf reading.
That may put the Fed in a tricky situation in regards to the euro zone, which may well be listing into yet another recession.
All of this actually argues for a longer wait for higher rates, which, given the examples in Japan and elsewhere, should not be surprising. Monetary policy in all its various forms only works a bit during these sorts of balance-sheet recessions.
A rate rise may come next June, or in September or later but the volatility will probably arrive well before the actual hike. – Reuter