Tic Toc Tic Toc

24 March 2015

Ears perched and investor eyes glued on Yellen globally! Oh so much concentration on a single word! After a two-day meeting, the Federal Reserve removed the word “patient” from its monetary-policy statement. Why the hullabaloo over this single word?

“Patient”, in Fed-speak, is a “code word” that it will hold off increasing interest rates for at least two meetings. Now the word has been ditched, at subsequent meetings (most likely in June though our “Dr.” Prevatt believes this can come closer to Q4) we could finally see rates move off from rock-bottom for the first time since 2008. We want to believe that Yellen has removed the gun from her holster and is preparing to pull that trigger.
The market went wild with opposing expectations as investors sat around the roulette table betting on the timing of the firing of the pistol that has been raised with the removal of the word PATIENT.The last rate-tightening cycle began over a decade ago. The Fed feels pretty comfortable, it may seem, with raising interest rates now that unemployment has moved towards 5.5%. The latest forecasts from the Fed show that it expects the US economy to expand by 2.3%-2.7%, a slight fall from the projections in December but still one of the strongest in the OECD, a club of mostly rich countries.

The possibility of pending interest-rate rises may worry many. The US dollar is already too strong some think and therate depreciated over 2% on the day. Thanks to the plunging price of energy and a rising US dollar, inflation is well below the Fed’s target of 2%, and has fallen in the past year. The Fed revised down its forecasts for inflation this year, though it thinks it will hit 2% by 2016, as the effect of lower energy prices wears off. In recent months American exports have been sliding.
Higher interest rates could have effects all around the world. Between 2009 and 2014 US dollar denominated credit to emerging-market economies—loans by banks and bonds issued by companies—almost doubled, from $1.7 trillion to $3.3 trillion. In 2013, when the Fed hinted that it was going to stop its quantitative-easing programme, investors pulled money out of emerging markets in the expectation of higher interest rates in America. Higher interest rates would make US bonds more attractive investment instruments, relative to TTD ones, causing a movement of funds from  T&T to the USA. Of course our Central Bank has signaled it will send up local interest rates but it could be at a time when the economy would already be depressed by low oil and gas prices. A veritable double whammy that could send us into a tailspin.
Which would be more important to defend, the exchange rate, economic activity, employment?


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