Committee on open markets Federal reserve system(Fed) The United States, based on the results of the June meeting, increased the base interest rate to 1-1.25% from 0.75-1% per annum, according to the regulator’s website.
Following a two-day meeting on June 13-14, the leadership of the US Federal Reserve decided to increase the base interest rate by 0.25 percentage points. up to 1-1.25%, according to the regulator’s website. This decision coincided with the expectations of most economists and market participants.
This is the second Fed rate hike in 2017. IN last time the regulator raised it in March to 0.75-1%. Before this, the rate of increase was slower - once each in 2016 and 2015. In 2007–2008, the regulator gradually lowered the rate until it reached a minimum level of 0-0.25% in December 2008.
The American central bank does not rule out a third increase before the end of the year, to an average level of 1.375%.
On April 11, the Federal Reserve announced an increase base rate, linking it to the healthy state of the American economy. At the same time, the Fed noted that they will not raise the rate too quickly or, conversely, delay this process. “We don't want to find ourselves in a situation where we have to raise rates too quickly, which could lead to a recession,” added US Central Bank Governor Janet Yellen.
Impact on the ruble exchange rate
As Igor Dmitriev, head of the Central Bank's monetary policy department, said in an interview with Reuters on June 8, the June Fed rate increase has already been taken into account in the Central Bank's monetary policy. According to him, it is necessary to pay attention to the accompanying comments. The Fed's focus on inflation or the labor market will make clear the Fed's future plans to raise rates, he said.
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Experts also advise paying attention to the Fed's comments. As Zvarich notes, as the rate increases, funding in dollars becomes more expensive. As a result, the spread between the cost of funding and the return on Russian assets becomes smaller. Hence the decline in interest in Russian instruments, explains the expert.
“An increase in the base rate will likely reduce appetite, and accordingly will have a negative impact on Russian assets and the ruble, but the effect will be insignificant, since the decision is already included in prices,” says Ivan Kopeikin, an expert at BCS FG.
A change in the Fed’s rhetoric and market expectations regarding the trajectory of the rate increase may affect the Central Bank’s further steps, says Yakov Yakovlev, senior analyst at ATON Investment Company for macroeconomics and debt markets. According to Zvarich, if the Fed takes a pause in the rate hike cycle until December 2017, the Central Bank will be able to further reduce the rate at upcoming meetings.
“Naturally, a Fed rate hike will lead to some pressure on Russian ruble(which, however, is moderately favorable for exporters and the federal budget), points out Sergei Khestanov, macroeconomics adviser to the general director of Otkritie Broker.
The decision had a moderately negative impact on the ruble exchange rate. On the MICEX, the ruble exchange rate against the dollar decreased by 0.78%, to 57.42, and against the euro - by 0.98%, to 64.51.
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The American stock market rose after the Federal Reserve's decision to increase the base rate. The day before it became known that the US Federal Reserve System (FRS) increased the interest rate to 1.25-1.5% from 1-1.25% per annum.
After that American market closed in the black. Thus, the Dow Jones industrial average increased by 0.03%, to 24585.43 points, the broad market index S&P 500 decreased by 0.05%, to 2662.85 points, the NASDAQ high-tech index increased by 0.2%, to 6875 .80 points.
The American regulator was able to make the decision to increase the rate against the backdrop of an improving economic situation.
"Information since the Fed's November FOMC meeting shows that the labor market continues to strengthen and economic activity is picking up at a robust pace this year."
— indicated in a message issued by the financial regulator on Wednesday following a meeting of its management.
At the same time, the Fed also points to a faster decline in the unemployment rate than predicted. "Related to natural disasters destruction and recovery affected economic activity, employment and inflation over recent months, but did not significantly change the course of the country’s economy as a whole,” the Fed also noted in its statement.
This Fed decision was quite predictable. Thus, only 4 out of 97 experts surveyed by Bloomberg expected the rate to remain at the same level, while all the rest predicted an increase in the rate to 1.25-1.5% per annum.
The Fed's current decision to raise rates is the third since the beginning of 2017.
The regulator raised the rate in June to 1-1.25% and in March to 0.75-1% per annum. Previously, the pace of Fed rate increases was slower: the rate was increased one-time in both 2016 and 2015. In 2007-2008, the Fed gradually lowered the rate due to the need to stimulate economic growth. In December 2008, the rate reached a minimum of 0-0.25%.
For 2018, experts predict that the rate will be increased to 2.25%. The economic situation in the United States will allow the American regulator to take such a step. The Federal Reserve expects the country's economic growth rate to increase in 2018 from the previously projected 2.1% to 2.5%, Janet Yellen, Chairman of the Fed Board of Governors, said on Wednesday.
“We expect economic growth in the United States to pick up in next year from 2.1% predicted in September to 2.5%. At the same time, the unemployment rate will drop to 3.9% from the current level of 4.1%,” she noted. The US unemployment rate is the lowest in 16 years.
Considering that a meeting of the Board of Directors of the Central Bank will take place on December 15, at which the Russian regulator may lower the rate, the Fed’s decision may lead to the withdrawal of foreign investors from Russian assets, since such investments will give investors much lower returns and will be less interesting.
As Igor Nikolaev, director of the company’s Institute for Strategic Analysis, noted recently at a meeting of the FBK economic club,
“ruble stability” this year was achieved due to the influx of funds as part of carry trade operations. According to market participants, the share of non-residents in the federal loan bond (OFZ) market exceeds 30%.
At the same time, a gradual increase in the Fed rate will add instability to the ruble.
In addition, in November of this year the Ministry of Finance received a lot of additional oil and gas revenues. So much that by the end of December it will use almost 204 billion rubles to purchase foreign currency. This is a record figure since February, when the financial department entered the foreign exchange market. The amount of such interventions is twice the amount of purchases in November, notes Alor Broker analyst Alexey Antonov.
The Ministry of Finance's interventions in December will also play against the ruble. Analysts interviewed earlier by Gazeta.Ru noted that the actions of the financial department will become another factor leading to the weakening of the Russian national currency. The only question is the timing and scale of the fall.
“In my opinion, the impact will be noticeable, but not predominant. At the end of the year, the activity of importers and banks will increase, which will have a stronger impact on the ruble. The actions of the Ministry of Finance will lead to an increase in trading volume by an average of 6%,” previously commented Georgy Vashchenko, head of the department of operations on the Russian stock market of Freedom Finance Investment Company. By the end of this year, the expert expected the rate to be around 60.50 rubles per dollar.
The dollar exchange rate on the Moscow stock exchange is now 58.61 rubles.
Improved US GDP growth forecast for 2018
Moscow. December 13th. website - The Federal Reserve System (FRS) of the United States, following a meeting on December 12-13, decided to increase the interest rate on federal funds rate by 25 basis points - up to 1.25-1.50% per annum, according to the Federal Reserve's communiqué Open Market Committee (FOMC).
The FOMC decision agreed with the vast majority of economists and market participants.
It still forecasts three interest rate hikes in 2018.
The leaders of the American Central Bank improved the US GDP growth forecast for 2018 from 2.1% to 2.5%, and confirmed the PCE inflation forecast at 1.9%.
“Information received since the November FOMC meeting indicates continued strengthening of the labor market and growth in economic activity at a solid pace,” the communiqué said.
At the previous meeting, the Fed gave the same assessment of the situation in the economy.
“Average job growth over the period since then has been strong, and the unemployment rate has continued to decline,” the report said. “Consumer spending rose at a moderate pace, and the growth rate of business fixed investment has accelerated in recent quarters."
"In annual terms as general indicator inflation and inflation excluding food and fuel prices have slowed this year and are below 2%,” the document says.
“Market indicators of inflation offsets remain weak, and survey-based indicators of long-term inflation expectations have generally changed little,” Fed officials said.
"The FOMC's responsibility is to promote maximum employment and price stability. The negative impacts of hurricanes and recovery efforts have impacted economic activity, employment, and inflation in recent months, but have not resulted in significant changes to the outlook for the U.S. economy," the statement said.
"Accordingly, the FOMC continues to expect that, with a gradual adjustment in the nature of monetary policy, economic activity will expand at a moderate pace and labor market indicators will remain strong. Annualized inflation is expected to remain slightly below 2% in the near term but will stabilize around the FOMC target of 2% over the medium term," the statement said.
“Short-term risks to the economic outlook appear roughly balanced, but the FOMC is closely monitoring inflation indicators,” the document notes.
"Given past and expected labor market conditions and inflation, the committee decided to increase the target interest rate range for federal lending funds to 1.25-1.50%. Monetary policy remains accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation," the Fed said.
“In determining the timing and size of future adjustments to the target Federal lending rate range, the committee will evaluate both actual and expected economic conditions relative to the targets of maximum employment and 2% inflation. This assessment will take into account a wide range of information. , including indicators of labor market conditions, indicators of inflation pressure and inflation expectations, as well as data on changes in financial and international conditions,” the document notes.
"The Committee will closely monitor actual and expected changes in inflation relative to the target level. The Fed expects that the nature of changes in economic conditions will provide grounds for a gradual increase in interest rates. Over time interest rate, is likely to remain below the level that will prevail in the long term. However, the actual path of interest rates will depend on the economic forecast based on incoming data," the Fed explains.
The decisions were a majority of seven votes in favor and two against. The head of the Federal Reserve Bank (FRB) of Chicago, Charles Evans, and his colleague from the Fed of Minneapolis, Neel Kashkari, voted against it because they wanted to keep the interest rate at the same level for now.
The next FOMC meeting will take place on January 30-31, 2018 and will officially be Janet Yellen's last as head of the Federal Reserve. From February 3, she will be replaced in this post by Jerome Powell. According to the expectations of market participants and members of the Fed leadership, the rate will not change at the January meeting.
Since the end of 2015, the US Federal Reserve has begun normalizing monetary policy. The essence of this process is to bring the level of the effective federal funds rate to a sustainable level. long term level (now estimated at approximately 4%), and also remove from its balance sheet the excess assets that the regulator acquired as a result of the quantitative easing program.
In December 2015, the rate was increased for the first time in 11 years by 0.25 percentage points. from near zero level. The next time the interest rate increased occurred only a year later - in December 2016, with a shift to the level of 0.5-0.75%. This year, the process of normalizing rates has accelerated, and two increases have already occurred - both of 25 basis points, and following the results of the December meeting, which will end on December 13, the interest rate is highly likely to be increased for the third time.
Why does the Fed raise rates?
Fed officials continue to argue that the rate hike is linked to expectations that inflation will rebound in the United States as the economy grows. Now the regulator is pursuing a policy to protect against a possible surge in inflation in the coming months due to the introduction of tax reform, which involves a significant reduction in the tax burden on business.
Tax reform in the United States is a key driver of high “risk appetite” in global stock markets: its implementation will accelerate US GDP growth next year to 2.0%-2.4% and accelerate inflation dynamics. In addition, the impact of Donald Trump’s presidential program on the economy in 2018, if it extends over 2-3 years, is estimated at 0.6%-0.8% of GDP, since part of the stimulus will most likely be used to repay debts and leveling out the slowdown in current growth rates. Against this background, the Federal Reserve is in a hurry to raise interest rates in order to create a basis for easing business conditions in the event of the loss of growth momentum and the US economy moving towards recession.
In February 2018, the post of head of the Fed will pass from Janet Yellen to Jerome Powell, but this will not change the direction of monetary policy in the United States. Despite the fact that the new head of the Federal Reserve is characterized by softer views, the market expects at least two more rate hikes in 2018 to 2%.
Thus, by the end of next year, the economy and financial markets may fall into an unpleasant trap: interest rates are rising, the Fed is determined to prevent inflation from rising above its 2% target within a year, while the US economy is not seeing much effect from tax reform and, according to forecasts, the rate of GDP growth begins to gradually slow down to 2% - this level can be reached in the fourth quarter of 2018.
What should an investor do?
What are the dangers of raising the federal funds rate to 2%? The fact is that, provided that long-term inflation expectations remain at about 2%, an increase in interest rates has the greatest impact primarily on the short part of the curve, pushing LIBOR rates and Treasury yields with a maturity of up to two years higher. . As a result, by 2019, “short” rates may be higher than “long” ones, which will negatively affect the dynamics of the financial sector. This inversion of the curve is often called a harbinger of recession.
This situation may be exacerbated by a liquidity shortage in the banking system due to the fact that the Federal Reserve, in parallel with raising rates, has begun to reduce its balance sheet. From October, the volume of assets under management of the regulator will be reduced by $10 billion per month, while sales are expected to increase quarterly with the goal of reaching $50 billion per month.
At the same time, an increase in the US government budget deficit in connection with tax reform may have a positive impact on the state of the stock market, fueled by both a decrease in multipliers and the likely announcement of plans by the largest corporations to conduct a buyback and pay increased dividends.
However, the expansion of the budget deficit creates medium-term threats to the Treasury bond market due to the high dependence of the US budget on market attractions of government debt and capital inflows. So in the future, the US Treasury may face an increase in borrowing rates and an increase in the cost of servicing debt obligations.
Against the backdrop of the European Central Bank’s reluctance to rush to increase key rate, and also taking into account expectations for the US economy, the euro-dollar pair may drop to the range of 1.14-1.16 per dollar by the end of the year. However, by the middle of next year, the euro may well strengthen to 1.20-1.25 per dollar - economic processes The ECB is unlikely to allow the ECB to delay normalizing rates, and fiscal stimulus in the US will be extended over time, which will significantly smooth out its impact on the American economy, which is in a mature growth phase.
Overall, the start of next year looks quite rosy for the stock and bond markets of both developed and developing countries. Risk appetite will be maintained at high level, which will bring stock indices to new highs, and the influx into high-yield assets can be converted into strengthening the currencies of developing countries. The Federal Reserve's further monetary policy, which carries risks of curve inversion, may rather become a good reason for taking profits on risky assets in the second half of next year.
Illustration copyright Gennady Safonov/TASS
The US Federal Open Market Committee on Wednesday raised its benchmark rate by 0.25 percentage points to a range of 1.25-1.5%. The American central bank is thus gradually tightening its monetary policy.
This is the latest rate hike under current Fed Chair Janet Yellen, followed by Jerome Powell early next year.
Experts expect that he will continue to tighten monetary policy: during the 2008-2009 crisis, the American central bank cut rates to almost zero, and also carried out large-scale asset purchases using newly printed money (these operations were called “quantitative easing”, or QE).
Just a few years ago, the Fed’s policy largely determined the state of global financial markets: flows of money from the American central bank flowed into developing countries, leading to the growth of their markets and strengthening currencies, and also contributed to rising oil prices after the 2008-2009 crisis. The first steps to tighten monetary policy in 2015 led to a fall in markets.
Now the influence of Fed policy has noticeably decreased. The BBC Russian service looked into how the Fed rate hike will affect the ruble in the long and short term, Russian market and oil prices.
Why won't markets fall after the Fed's decision?
"Markets have already priced in the Fed's rate hike," Renaissance Capital economist Charles Robertson told the BBC.
The same is stated in the report of the investment division of Sberbank (Sberbank CIB): “the increase in rates has already been fully appreciated by the markets and in itself will not lead to any market reaction.” According to the bank's analysts, the market's reaction will depend on the Fed's forecasts for 2018 - the regulator usually gives a signal about how rates will rise next year.
The market now assumes that the Fed will raise rates 2-3 times next year, Robertson explains. Emerging markets may react if the Fed gives a signal that next year they will raise rates by 3-4 times, the economist explains.
The change of the head of the Fed limits the significance of any assessments, Anton Tabakh, chief economist of the Expert RA agency, disagrees. After a series of new appointments, the dynamics of rate increases may change, he explains. At the beginning of next year, there will be a number of personnel changes at the Fed: not only the head of the Central Bank will change, but also a number of high-ranking officials of the American central bank.
Why does Fed policy have less and less impact on emerging markets and Russia?
Fed policy, according to Tabach, has less impact on emerging markets than before, and for other reasons: the investor base in emerging markets has become broader.
This year, the Fed has raised rates three times: at the beginning of the year, the rate was only 0.5-0.75%. Markets in developing countries are growing much faster than those in developed countries. Thus, the MSCI index for developing countries grew by almost 27.7% in 2017, while the British FTSE 100 index added only 7.7%, and the American S&P 500 - 17.5%.
Economists in various reports explain the growth of emerging markets by the acceleration of their economies, for example, the growth of the Russian economy accelerated, and in the middle of the year, many experts, although only slightly.
Tabakh also names another reason: Fed policy changes have become more predictable. They are announced in advance, and investors can “build them into the price,” the economist explains.
The Fed sets rates for the US economy, but the regulator is also concerned about how its actions will affect confidence in global markets, Sberbank CIB chief strategist Tom Levinson explained to the BBC. "US rates are rising, but the gradual rise in rates is supporting emerging markets," the economist explained. Levinson does not see that rising rates can somehow affect the ruble exchange rate.
"The Fed's policy remains soft. This softness means that a lot of money is distributed around the world, including Russia," Robertson adds. According to him, Fed rates, even after the increase, are still significantly below the combined level of economic growth and inflation.
Will rising rates in the US affect the ruble and oil?
The ruble exchange rate in recent months has actually become untied from oil prices, experts and ministry officials economic development Russia. One of the reasons for this is carry trade operations - when investors make money on the difference in interest rates in different countries. They borrow currency from a country with low interest rates, like the United States, and buy currency from a country with high interest rates, such as Russia. And then they invest the money in bonds, which brings additional income.
“Carry trade will inevitably decline on both sides - from rising rates in the United States and from their reduction in Russia,” explains Anton Tabakh.
“Most likely, we will not see a strengthening of the ruble next year; most likely, there will be a weakening,” he believes.
Both Tabakh and Levinson noted that the oil market is almost now independent of the Fed's policy. “Oil prices are now determined by supply and demand factors in the energy market,” explains Levinson from Sberbank. This essentially means that Fed policy will not affect them.
