“The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar,” Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short. Though the Fed chair did not make a decisive comment about interest rates or immediate policy concerns, Yellen said that the major concern of the Fed is to stop U.S. economic potential from slipping away. The main reason for keeping a high-pressure economy can be because the growth to recover from the Great Recession has been slower than anticipated.
The impact of Yellen’s words was pretty significant on the Asian market. Asian shares fell on Monday while the dollar held firm near seven-month high against a basket of major currencies after comments from the Fed chair. Current U.S. inflation rate is 1.15% and the target inflation rate is 2%, which seems achievable if they keep the easy monetary policy stance they are following for a relatively longer time. The word that came from Janet Yellen was enough to push up long-term U.S. bonds. Higher U.S. bond yields attracts more foreign investors which helped the dollar post its largest weekly rise against a basket of six major currencies in more than seven months last week.
“The ICE U.S. Dollar index DXY, -0.10% which measures the greenback’s performance against six other currencies, was up 0.3% at 97.915, a seven-month high. The buck has climbed about 2.6% so far in October”, according to FactSet data.
There were various reasons that led to the instability in Asian markets at the end of the week which even led to a flat start on Monday morning. It started with the death of Thailand’s King Bhumibol Adulyadej, which affected the Thai market drastically because of political uncertainties. With the comments made by Yellen, the yields of the bonds fell, attracting foreign investors to long-term bonds in the U.S. which brought down the Japanese Yen to it’s all-time low in the past 3 months. China’s CSI index (CSI300) fell 0.6%, while Hong Kong’s Hang Seng (.HSI) slid 0.9%. The reason behind the fall in Chinese markets is its increasing debt levels, constant government spending and an overheating housing market, which in turn affected the Hong Kong market.
Analysts and investors are keeping a keen eye on December to see if there will be a hike in the Federal funds rate, but with the dollar on a high and stronger economic growth compared to its competitors, an increase is very likely. Jeffrey Gundlach, CEO of DoubleLine Capital said that ‘Yellen’s thoughts and plans are long-term and looking at the future aspect because not only is U.S. eyeing it’s targeted inflation rate, they are trying to bring up the GDP which keeps fading away every now and then and has been on a lower side.’ If we look at this situation from Yellen’s and Fed’s viewpoint, it’ll be a good guess to say that they are trying to increase business sales to see a boost in the economy. Plus, there are various events such as the upcoming elections, occurrence of Brexit that could have major impact on the market altogether, so an easy monetary policy, high-pressure economy and attraction from foreign investors seems to be the right approach at this point of time.
With the upcoming elections bearing a cloud of uncertainty and increasing volatility in the market, it’s hard to predict if there will be a hike in December. A lot of further judgments and assumptions can be made after the new policies that will be implemented in November by the new office and till then, we could expect no hike to a hike by 50-100 basis points if the inflation rate rises in the coming months. If not, it would be interesting to see how that plays a role in the global market till the next Fed meeting and announcement in March 2017.