How Asian Stocks & Currencies React to the Federal Reserve's Interest Rate Hike
The US Federal Reserve finally decided to raise the Fed Fund Rate by 25 basis points at its December policy meeting (15-16 December) on a considerable improvement in US labor market conditions (the US unemployment rate having fallen to 5 percent) and US inflation projected to meet the Fed's 2 percent target over the medium term. After this announcement US stocks soared. Emerging markets were not hit by severe capital outflows after the rate hike. Asian stock indices strengthened sharply on Thursday morning (17/12).
Federal Reserve Chairwoman Janet Yellen announced on Wednesday (16/12) that the US central bank raised its policy rate to the range of 0.25-0.50 percent from a near decade-long historic low of 0.00-0.25 percentage points. Toward the future the Fed expects to see more gradual rate increases. The US central bank emphasized that further monetary tightening in the world's largest economy will be very gentle.
Immediately after opening Indonesia's benchmark stock index (Jakarta Composite Index) rose over one percent to 4,531.21 points, while the rupiah exchange rate appreciated 0.18 percent to IDR 14,045 per US dollar.
Now global financial markets show signs of relief (on certainty about US monetary policy), emerging market currencies may strengthen considerably as many believe that these currencies are still undervalued.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR)
appreciated 0.16 percent to IDR 14,028 per US dollar on Thursday (17/12).
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaThe positive reaction of emerging market assets on the Federal Reserve's rate hike could mean that Bank Indonesia will cut its benchmark interest rate (BI rate) by 0.25 percent at today's Board of Governor's meeting.
On Wednesday, US stocks soared after the rate hike announcement. The Dow Jones industrial average climbed 1.3 percent, the Standard & Poor's 500 index jumped 1.5 percent, while the Nasdaq composite rose 1.5 percent