Fed Cuts Stimulus Program Again; Indonesia's Rupiah and IHSG May Fall
On Wednesday (29/01), the Federal Reserve (Fed) announced to cut its massive bond-buying program (quantitative easing, QE) by another USD $10 billion after the FOMC meeting, while maintaining interest rates close to zero. Originally, the Fed's QE program, implemented in September 2012, totalled USD $85 billion per month but after the cuts in December 2013 and January 2014, it is now wound down to USD $65 billion per month and if the pace of tapering continues, the program might be over by the end of 2014.
The Federal Reserve cited economic improvement in the USA, the world's largest economy, as reason for the winding down. Household spending and business fixed investment are rising faster than expected although labor market indicators remain mixed.
On Wall Street, the Dow Jones Industrial Average fell 1.19 percent to 15,738.79 on Wednesday (29/01) due to the Federal Reserve's tapering announcement as well as some lackluster earnings reports (for example AT&T and Boeing).
Indonesia's rupiah exchange rate and the country's benchmark stock index (Jakarta Composite Index/IHSG) are expected to weaken on Thursday (30/01) as a result of the winding down of the Fed's quantitative easing program. With continued tapering ahead, emerging markets will feel the further impact of capital outflows. On Thursday morning, Asian index futures fell and emerging-market currency forwards weakened, while the yen and gold maintained gains.
After Ben Bernanke started to speculate about an end to the quantitative easing program in late May 2013, Indonesia's rupiah and IHSG experienced significant corrections:
| Source: Bank Indonesia
US Dollar (USD) to Indonesia Rupiah (IDR)
Jakarta Composite Index