In the March Federal Open Market Committee (FOMC) monetary policy meeting it was agreed that the word ‘patient’ would be removed from the forward guidance implying that an interest rate hike could be implemented at any occasion from June forward. However, Fed Chief Janet Yellen stated at a press conference that although the Federal Reserve dropped the word ‘patient’ it does not mean that the institution has become impatient regarding an interest rate hike. Yellen emphasized that the Fed’s first rate move would be dependent on US job market and inflation data. Moreover, she expects future rate hikes to be very gradual.

Internal disagreement about the timing of the hike makes it highly unlikely that the world will see higher US interest rates in June 2015. Moreover, the Federal Reserve said in its latest statement that it needs to see more improvement in the US job market (the March US payroll report - which was released after the March FOMC policy meeting - showed that only 126,000 new jobs had been added meaning that growth decelerated in the first quarter) and that it needs to be reasonably confident that US inflation will move toward the institution’s 2 percent (y/y) target.

Several policymakers also expressed concern about bullish US dollar momentum and low energy prices to continue pushing US inflation below the Fed’s 2 percent (y/y) target and therefore these policymakers would prefer to see an interest rate hike in the fall, end of this year, or next year.

Analysts now believe that September 2015 would be a good timing for a (small quarter-point) rate hike. After the first interest rate hike, the Federal Reserve is likely to decide further rate hikes based on how financial markets react; if treasury yields soar after the first rate hike, then the Federal Reserve may decide to wait for a while before introducing another hike. However, if markets show no significant response to the first rate hike, then the Federal Reserve is likely to be confident to accelerate interest rate hikes.

In response to the FOMC minutes, Asian stocks tend to climb on Thursday’s trading day (09/04) as these markets are relieved to see that the Fed is still divided on the timing of higher interest rates. However, Indonesia’s benchmark Jakarta Composite Index was down 0.09 percent to 5,481.50 points after the first trading session. Possibly the market is reacting negatively to the news that Indonesia’s foreign exchange reserves fell from USD $115.5 billion in February to USD $111.6 billion in March. As such, market participants have engaged in profit-taking.

The Indonesian rupiah had appreciated 0.38 percent to IDR 12,908 per US dollar by 12:35 pm local Jakarta time on Thursday based on the Bloomberg Dollar Index. Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.22 percent to IDR 12,973 per US dollar on Thursday (09/04).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Since December 2008 the world’s largest economy has set its federal funds rate at a historically low level of between 0.00-0.25 percent in a move to boost the economy amid the financial crisis in the late 2000s. In combination with a generous US monetary stimulus package (quantitative easing), which was finally scrapped altogether at the end of 2013, a significant portion of these funds went to emerging markets where yields were more attractive (but also more risky). Indonesia is one of these emerging markets which saw capital inflows due to the monetary easing in the USA.

However, this trend changed when the Federal Reserve started to speculate about the winding down of the quantitative easing program in late May 2013. Emerging markets were then plagued by capital outflows. However, whereas emerging market stocks managed to recover throughout 2014 and 2015 (even touching record highs), emerging market currencies continued to depreciate amid bullish US dollar momentum.