Morning Briefing: Fed’s Powel Speechs Bring Optimism to the Market, Indonesian Fuel Subsidy Double

The Federal Reserves (Fed) chairman, Jerome Powell, give a signal that the Fed Fund Rate (FFR) will stay near zero percent until 2023 - Photo by The Fed Office

JAKARTA (TheInsiderStories) – Good morning. Chairman of the Federal Reserve (the Fed) Jerome Powel to United States’s (U.S) Congress bring optimism to the market. Meanwhile, Vice President Mike Pence in his remarks at the U.S’s Department of Commerce on July 16, assured that the government will continue to protect the country’s economy.

In the Fed’s statement released yesterday, Powell said for now, the best way forward for the central bank is to continue raising the Fed funds rate gradually. Last month, the central bank raised its rate for the second time of this year, and forecast more than two rate hikes for the year

He stated, raising interest rates too slow can lead to high inflation or financial market excesses. On the other hand, but if raise the interest rates too soon, the economy may weaken and inflation may continue below our target, Powell testified, said Powell.

Over the first half of 2018, the Federal Open Market Committee (FOMC) has continued to gradually reduce monetary policy accommodation. Specifically, the Fed raised the target range for the federal funds rate by 1/4 percentage point at both March and June meetings, bringing the target to its current range of 1-3/4 to 2 percent.

In addition, last October we started gradually reducing the Fed’s holdings of treasury and mortgage-backed securities. That process has been running smoothly. This tool, Powell said, has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy.

He continued, the committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. In addition, Powell showed that the U.S economy has grown “at a steady pace” so far this year, with a strong labor market and inflation close to the central bank’s target.

Concern on President Donald Trump’s government trade policy “may also” impact on U.S wages and capital spending, he testified although not yet appearing in figures. However, he believed it is still too early to say how trade policy will affect the Fed’s monetary policy, as it is “difficult to predict” the end result of the current discussion on trade policy as well as the size and timing of the economic effects of fiscal stimulus.

Powell hinted that the era of stable economic growth can continue. However, he also received senator concerns in a congressional hearing linked to Trump’s government trade policy.

Incoming data show that, alongside the strong job market, the U.S economy has grown at a solid pace so far this year. The value of goods and services produced in the economy–or gross domestic product–rose at a moderate annual rate of 2 percent in the first quarter after adjusting for inflation, he remarked.

He added, the latest data suggest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors like a robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months.

Furthermore he said, investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. While housing construction has not increased this year, it is up noticeably from where it stood a few years ago.

Talking on inflation data, Powell figured out, after several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago.

Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. He assured that the board of FOMC will continue to keep a close eye on inflation with the goal of keeping it near 2 percent.

Domestic Economy

In the hearing with Budget Committee of the Indonesian parliament yesterday, Finance Minister Sri Mulyani Indrawati projects that the realization of energy subsidy budget will swell almost doubled to Rp163.49 trillion (US$11.43 billion) or rose 173 percent from initial planned in the 2018’s State Budget of Rp94.53 trillion.

That would be the highest subsidy bill since 2014 and compares with Rp97.6 trillion rupiah last year, official data show.

She explained, the amount consists of the realization of fuel subsidy budget and LPG 3 kilogram of Rp103.5 trillion or 220.8 percent raised and the electricity subsidy budget of Rp 59.99 trillion or 125.9 percent higher than the target.

Until the first half of 2018, the realization subsidy reached Rp 59.51 trillion or 63 percent over the target. Indrawati continued, the swelling of the subsidy budget is the result of the government’s calculation based on the amount of subsidy that already existed in the first semester and the difference in the price of diesel set at the current price.

The magnitude of the realization also is the result of the discussion with the Minister of Energy and Mineral Resources and the Minister of SOEs as well as taking into account state-owned energy producer PT Pertamina and PT Perusahaan Listrik Negara’s (PLN) financial balance.

Earlier, the minister stated that the government had agreed to increase diesel subsidy amounting to Rp1,500 per liter for the total subsidy to Rp 2,000 per liter to keep Pertamina’s balance sheet maintained to run the policy of the subsidy.

President Joko Widodo earlier of this year slapped price controls on power and fuel prices, prompting criticism from analysts and credit ratings companies and raising questions about his zeal for economic reform ahead of the presidential election in April.

To help the government’s budget we proposed Widodo to raise the price of fuel oil amid conditions of oil prices that tend to rise upwards. The other reason, if the government kept the subsidy policy until the year of 2018 will hurt Pertamina and PLN’s financial condition.

US$1: Rp14,300