After the speech of Federal Reserve Chair Janet Yellen at an annual meeting of central bankers in Jackson Hole (Wyoming) on Friday (26/08), speculation about a looming Fed Funds Rate hike has risen. In her speech Yellen said the case for higher US interest rates has strengthened in recent months due to the nation's economic growth and stronger jobs market. Meanwhile, Federal Reserve Vice Chairman Stanley Fischer said a US interest rate hike could come as early as September 2016.
Although a September rate hike seems to come too soon, rising speculation about a "sooner-than-later" US interest rate hike may cause some pressure on emerging markets next week. Generally, monetary tightening in the USA leads to capital outflows from the higher-yielding, yet riskier emerging market assets, including Indonesian stocks and the rupiah.
Despite US gross domestic product (GDP) growing at a sluggish 1.1 percent (y/y) in the second quarter of 2016 (revised down from the previously reported 1.2 percent y/y) due to weak business investment and weak exports (caused by the strong US dollar), Yellen said many new jobs were generated over the past couple of months while US economic growth is expected to continue at a moderate pace. Moreover, prices have remained stable amid solid consumer spending.
The US Federal Reserve raised its key interest rate in late-2015 for the first time in almost a decade after having gradually wound down the quantitative easing program one year earlier. A September 2016 rate may be too soon but there is a good chance that the Fed decides to raise rates before the year-end.