Morning Briefing: Analyst Sees a September Rate Hike by Fed

JAKARTA (TheInsiderStories) – Good morning. Federal Reserve (Fed) did not raise interest rates on Wednesday (01/08), but some analyst saw the U.S’s central bank set the stage for a September hike.

In the last meeting, Federal Market Open Committee (FOMC) decided to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

Since the FOMC met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low.

Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators 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 FOMC expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

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 maximum employment objective and its symmetric 2 percent inflation objective. 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.

Meanwhile, U,S Secretary of State Mike Pompeo has started his visit to Singapore, Malaysia and Indonesia. He and President Joko Widodo are scheduled to meet on Sunday with the escalation of U.S-China trade war will certainly feature in the discussion.

During his Southeast Asia tour, with Indonesia as the last stop, Pompeo announced US$113 million worth of initiatives in technology, energy and infrastructure, perhaps to court the region away from China. The amount, however, is minuscule compared to the China’s investment in the region.

Widodo may also use the meeting to seek clarification from Pompeo whether Indonesia is also on the crosshair of the US’s tariff policy, considering the large surplus which reached $4.1 billion in the first six months of this year.

One the other hand, Pompeo may use the occasion to find a new market for U.S soybean, which is one of the most affected in the escalating tit-for-tat tariff between U.S and China. Given Indonesians’ love affair with tofu and tempeh, Indonesia could be that wiling buyer.

As news emerged that the U.S President Donald Trump planned to charge $200 billion worth of Chinese imports with 25 per cent tariff, more than the initial plan 10 per cent, the Chinese government promised retaliation “to defend national dignity”.

The escalation was a grave concern for stock market investors in Asia, including Indonesia. The Jakarta Composite Index was down 0.36 percent at 6011.72 on Thursday, despite foreign investors continued its strong appetite with net buy of Rp155 billion.

The Rupiah was down slightly at 14,446 a dollar on Thursday (02/08) versus 14,442 on Friday (27/07) in response to the release of US jobless claims data which show the US employment market continued to gain momentum and also the Bank of England’s decision to raise its interest rate to 0.75 per cent, a level not seen since March 2009.

Concerns over persistent fall of the Rupiah continued to weigh on the mind of Indonesia’s top executives. After Widodo announced the government will evaluate infrastructure projects in hope reducing imports, his deputy Jusuf Kalla once again flirted with the idea of foreign capital control.

The Vice President said that around 80 percent of earnings from exports remained within Indonesia, but only 10-15 per cent of that were converted into the rupiah. Similar view was shared by Darmin Nasution, the Coordinating Minister for Economic Affairs.

Unfortunately, words from both Kalla and Nasution were meaningless unless similar view was supported by Bank Indonesia’s Governor Perry Warjiyo, who holds the mandate on the issue. However, if BI takes such measures then chatter about government’s interference is inevitable, which is a big taboo in the world of central banking.

Hope you have a profitable day.

TiS Intelligence Team, Email: