Photo by The Fed

JAKARTA (TheInsiderStories) – U.S Federal Reserves (The Fed) decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent, said the central bank on Wednesday (26/7). The action followed other central banks (CBs) in the world to hold the rates

“In view of realized and expected labor market conditions and inflation, the Committee  The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation,” Said Fed’s chair Janet Yellen in the press statement.

Indonesia’s central bank (BI) left its benchmark 7-day reverse repo rate unchanged at 4.75 percent on July 20th 2017, for past ten consecutive months, in line with market expectations. Policymakers said the decision is consistent with efforts to maintain macroeconomic and financial stability while still encouraging domestic economic recovery process.

Also the European Central Bank (ECB) held its benchmark refinancing rate at 0 percent on July 20th, as widely expected, and confirmed the net asset purchases are intended to run at the current monthly pace of €60 billion until the end of December 2017, or beyond, if necessary. Policymakers said that economic and monetary analysis confirm the need for a continued very substantial degree of monetary accommodation.

While the Bank of Japan (BoJ) left its key short-term interest rate unchanged at -0.1 percent at its July 2017 meeting, as widely expected. Policymakers also kept its 10-years government bond yield target around zero percent but said they pushed back again the timing for achieving its 2 percent inflation target to sometime during fiscal 2019.

That said, the BoJ has now postponed the price target timeframe six times since Governor Kuroda launched huge asset-buying program in 2013. Meanwhile, in a quarterly review of the central bank’s forecasts, it said the recent development in the CPI had been relatively weak, as evidenced by limited price rises at the start of the new fiscal year.

No surprises as ECB, BoJ and BI made their decision on interest rate policies inline with the expectation of the most. So this would also happen to Fed, to also keep it from raising U.S. rates at its policy meeting next week on concerns over low inflation and disappointing retail sales data.

Major central banks around the world have started to tighten monetary policies. BoJ opted to push back the timeline to achieve its 2 percent inflation target, would invite downward pressure on interest rates and downward pressure on exchange rate.

Meanwhile BI said it decided to hold interest rate for maintaining macroeconomic and financial system stability, while considering the dynamics of global and domestic economy. The process of domestic economic recovery continues albeit not as strong as previously projected, especially due to consumption slowdown despite an increase in investment. Pressures on inflation are expected to decrease below previous expectations, due to week demand and controllable food price.

BI said the persistent risks to monitor especially coming from the US, including the planned FFR hike, the Fed’s plan to unwind its large balance sheet, and uncertainties in the fiscal policy. BI noted that the global economy is improving as projected, despite several risks that demand vigilance. On one hand, the US economic growth is expected to be lower after the limited impact of fiscal policy and investment was squeezed by a potentially lower oil price.

On the other hand, China’s economy is expected to accelerate on the back of stronger consumption and rising exports. The economy in Europe is also predicted to gain momentum as consumption increases, while export performance and optimism in the economy have improved. Meanwhile, high international commodity prices are expected to persist despite potential downside pressures on the oil price linked to oversupply outstripping limited demand.

Furthermore Yellen explained, the information received since the Federal Open Market Committee (FOMC) met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand.

On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.

Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

(Written by Linda Silaen: Email: linda.silaen@theinsiderstories.com)

LEAVE A REPLY

Please enter your comment!
Please enter your name here