Federal Reserve Raises Rates, What's the Impact on Asian Assets?
In line with expectations the US Federal Reserve announced to raise its key interest rate by 25 basis points to 1.00 - 1.25 percent after conclusion of the June policy meeting on Wednesday (14/06), its second hike in 2017. It also announced it will soon start its balance sheet unwinding plan, meaning cutting its massive (USD $4.5 trillion) holdings of bonds and securities. The Fed also informed US inflation will remain below its target with core inflation slowing for a fourth month in May 2017. But despite soft inflation, it goes ahead with monetary tightening.
The rate hike was widely predicted and therefore market participants were more interested in the Fed's statements about the balance sheet unwind. Federal Reserve Chair Janet Yellen said she sees the balance sheet unwinding plan beginning soon and that the Fed will keep normalizing its policy provided the economy evolves as expected.
Federal Reserve's Balance Sheet Unwind:
• Roll off USD $6 billion of treasuries per month
• Roll off USD $4 billion of mortgage-backed securities (MBS) per month
• Increasing the cap to USD $30 billion treasuries and USD $20 billion MBS over the next 12 months
• When targets are met, total runoff per month will be USD $50 billion
The Fed's balance sheet unwind "beginning soon" means markets have not been given an exact target date and therefore the game continues with looming volatility in equity markets ahead of each Fed meeting.
Regarding inflation, the Fed sees it stabilizing but remaining below 2 percent (y/y) in the next 12 months. However, it raised its forecast for US GDP growth from 2.1 percent (y/y) to 2.2 percent (y/y) in full-year 2017 and sees a bigger decline in unemployment than its previous forecast.
After the Fed announcement the Dow Jones Industrial Average managed to touch an all-time high of 21,391.97 overnight, finishing 0.2 percent higher than the preceding day. Meanwhile,the S&P 500 Index fell 0.1 percent, while the Nasdaq Composite fell 0.4 percent, led by tech stocks.
Meanwhile, crude oil prices plunged nearly 4 percent overnight on news of a surprise build in US gasoline stocks.
So far this morning Asian stocks are mixed on Thursday (15/06). Investors doubt whether the Fed will indeed stick to its plan of raising rates three times this year due to soft inflation. However, markets are also concerned about the news that US President Donald Trump is being investigated by a special counsel for possible obstruction of justice. Markets in Asia are also cautiously waiting whether China's central bank will follow the Fed with another round of money market rate increases (like it did in March 2017). Meanwhile, the Bank of Japan begins its two-day meeting today.
Indonesia's benchmark Jakarta Composite Index, which touched an all-time record high on Wednesday (14/06), could be vulnerable to profit-taking today.
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