Fed signals higher interest rates coming
New Zealand (Sept 18) New Zealand exporters may start feeling better about their prospects after the United States Federal Reserve yesterday calmly signalled higher interest rates were on the way.
The Fed sought to reassure markets by reiterating its pledge to keep overnight interest rates low for a ''considerable time'' after it stops its quantitative easing programme in October.
''Considerable time sounds like it is a calendar concept, but it is highly conditional and it is linked to the committee's assessment of the economy,'' Fed chairwoman Janet Yellen said at a press conference.
''There is no fixed mechanical interpretation of a time period.''
Harbour Asset Management director Christian Hawkesby said the Fed retained some wriggle room and the market interpreted it to imply no increase in the overnight Fed funds rate until mid next year.
''However, alongside the calming and reassuring press release, the US Fed's own economic forecasts suggest they have growing confidence US interest rates will be rising steadily in coming years.''
The Fed's median forecast for the overnight funds rate at the end of next year rose from 1.13% to 1.375%, while the median 2016 forecast rose from 2.5% to 2.88%.
For the first time, the Fed released an end-of-2017 forecast of 3.75%, which was considerably above the equivalent interest rate futures contract trading rate of 2.95%, he said.
The main market implication was the strength of the US dollar as markets looked forward to the period when US interest rates were no longer so low.
The US dollar strength saw the New Zealand dollar fall below US81c from its peak of US88c in mid-July.
''This will be welcome news to the Reserve Bank following its repeated warning the level of the dollar is unjustified and unsustainable,'' Mr Hawkesby said.
Craigs Investment Partners broker Chris Timms said the global economy faced a growing risk from big financial market bets which could quickly unravel if investors got spooked by geopolitical tensions or a shift in US interest rate policy.
The International Monetary Fund indicated it still expected economic growth to increase in the second half after a rough start to 2014.
''But it also warned financial market indicators suggested investor bets funded with borrowed money looked `excessive' and the markets could quickly deflate if there were surprises in US monetary policy or the conflicts in the Ukraine and the Middle East.''
The IMF prepared its report for the Group of 20 meeting of finance ministers and central bankers in Australia this weekend and just before the Fed's regular meeting, Mr Timms said.
In February, in Sydney, the G20 finance ministers fixed a goal of raising global economic growth by 2% over five years, but left the strategies to reach it vague.
''The global recovery should regain strength, but down-side risks have risen,'' the IMF said in its report, urging the G20 to work together to produce beneficial spillover effects that will help them as well as the global economy.
According to the 188-nation IMF, the advanced economies which had the means - specifically the US and Germany - and certain emerging-market economies such as Brazil and India should increase public spending on infrastructure.
Structural reforms were needed across all the G20 economies to boost potential output, it said, pointing to the productivity boost that would come from easing limits on trade and investment in Indonesia, Russia and Turkey.
The IMF called for labour reform that lifted gender and age barriers in advanced economies, such as the US and Japan, and allowed greater participation, such as in South Africa, where an ''important fraction'' of the population remained unemployed.
''Actions to increase labour demand and remove impediments to employment are also needed in stressed euro area economies,'' it said.
Source: ODT.NZ
