The US Federal Reserve is set to raise rates by a quarter of a percentage point. Despite Trump's calls not to do this in order to maintain economic growth, the result of the latest Fed meeting will be an increase in the discount rate to 2.5 percent. As a result, by the end of the week the dollar will be sold at 68.2 rubles.
The Federal Reserve has raised rates three times this year and intends to continue the cycle. According to leading Amarkets analyst Artem Deev, the actions of the American regulator benefit the national monetary exchange rate. The United States is developing rapidly economically. With GDP growing by 3.5%, inflation remains at 2 percent. These are the best figures over the last 10 years.
However, according to the head of the White House, it makes no sense to raise the rate, since the dollar is already stable. In addition, in light of recent events in the world, the Fed's decision may have a negative impact on the American economy. One way or another, the decision has already been made, the rate has been raised, but from now on the Federal Reserve will be more cautious.
How will the Fed's decision affect the ruble exchange rate?
According to analyst Vladimir Rozhankovsky, market sentiment is affected by China's intractability, which interferes with the normal development of foreign trade relations. The result could be a sharp drop in trade volumes, leading to a loss of $430 billion in global GDP.
Moreover, raising interest rates will eventually cause the US economy to collapse. Analysts even give approximate dates - the second half of 2020. This will force the Federal Reserve to change tactics and lower interest rates.
At the same time, regarding the influence of the American regulator on the state of the ruble, experts have no consensus. Some experts believe that the Central Bank's increase in rates to 7.75% per year will protect the national currency from falling. The ruble exchange rate no longer depends on the collapse in the oil market to $60 per barrel. If the Fed does not sharply raise rates, the dollar will still remain within 67 rubles. Maximum it can rise to 68.2 rubles.
The only thing that can lead to its collapse is the actions of the Bank of Russia itself, which decided to resume purchasing foreign currency according to budget rules from the beginning of 2019.
The American regulator increased the money market rate by 25 points - to the level of 2-2.25% per annum. This is exactly the moderate increase scenario that experts predicted. This decision is already included in the current quotes, so the ruble exchange rate will not collapse this time. However, if in the future the United States sharply raises the rate, the ruble will not be able to resist, analysts predict.
Federal Open Market Committee The Federal Reserve System (FRS) of the United States for the third time in 2018 raised the base money market rate by 25 basis points. Now it will be in the range of 2-2.25%.
The decision to raise the rate was made unanimously by representatives of the Federal Open Market Committee (FOMC). The FOMC usually raises it to prevent inflation from accelerating and the economy from overheating.
Since the committee's last meeting in August, macroeconomic statistics have shown that the labor market continues to strengthen and economic activity is growing steadily, the FOMC said in a release. The US unemployment rate remained low, the number of jobs grew, as did household spending.
“Consumer spending and business investment in fixed assets grew at a rapid pace,” the document notes.
At the same time, annual inflation remains around the target of 2%.
The FOMC decision coincided with the forecasts of the vast majority of economists and market participants. This is exactly the kind of moderate, rather than aggressive, rate increase that was predicted by the experts interviewed by Gazeta.Ru.
The Fed said in a statement: “In determining the timing and size of future adjustments to the target interest rate range for federal lending funds, the committee will evaluate both actual and expected economic conditions relative to its targets of maximum employment and 2% inflation.”
At the same time, at the previous committee meeting, held on July 31 - August 1, the regulator made it clear that it intended to raise the rate twice more, in addition to the previous two increases.
Let us recall how the Fed rate increased in Lately. At the end of 2015, the Fed raised the base interest rate from a near-zero level to a level of 0.25%, for the first time in almost 10 years.
In 2016, the rate was raised once to the level of 0.5-0.75%. In 2017 it increased three times. Since 2018, the rate has been increased twice, in March and June. And in 2019, the American Central Bank made it clear that it could increase it three times.
investors will continue to expect another hike before the end of the year and at least two hikes during 2019: monetary policy will continue to tighten in order to protect the economy from overheating.
According to Anastasia Ignatenko, leading analyst at TeleTrade Group, even the Federal Reserve’s rhetoric that monetary policy will be tightened can be a reason for a sharp strengthening of the American currency.
After almost two years of waiting, the US Federal Reserve finally decided to raise its rate. This happened for the first time in the last nine years. It is no coincidence that the whole world watched the actions of the American regulator so closely - the actions of the Fed will have an impact on the entire global economy. This will also have extremely serious consequences for Russia.
Late Wednesday night, the Fed announced it was raising its benchmark rate from a record low of 0-0.25% to 0.375% per annum. Expectations of this decision have long strengthened the American currency.
“The Fed’s steps will not have a direct impact on Russia. However, the indirect impact through the strengthening of the dollar and falling oil prices may be quite sufficient.”
The last time the US Federal Reserve raised rates was June 29, 2006. Throughout 2007–2008, the Federal Reserve gradually lowered the rate until it reached its minimum level in December 2008. Since then, the rate has remained at 0.25%.
To cope with the financial crisis that had set in at that time, Washington began printing money, launching three so-called quantitative easing programs in a row. Part of the money ended up in the stock market, which began to grow much faster than the American economy itself, and the world economy as a whole. This allows us to talk about inflating a financial bubble in the United States. However, Washington stopped it in time printing press, in October 2014, and announced plans to raise the rate.
This is what largely allowed the dollar to strengthen so much over the past year. Last year and influence the fall in oil prices. Raising interest rates should gently deflate the stock market bubble, preventing it from collapsing abruptly.
The Fed rate remained at zero for six years, which means a failed policy, in an interview with the newspaper VZGLYAD, authoritative Chinese expert on the global financial system, Song Hongbin (he managed to predict the American mortgage crisis of 2007 and the subsequent global financial crisis). “If the US Federal Reserve wants other players to be confident in the American economy and the dollar after the quantitative easing policy, as in previous times, then it will have to raise the key rate,” he explained the hopelessness of the American regulator’s actions.
At the same time, the Fed has to act in opposition to the position of other players, notes FxPro financial analyst Alexander Kuptsikevich. Central banks of other major economies, on the contrary, are reducing their rates. Thus, the ECB literally lowered the rate on December 4 and extended the duration of the European quantitative easing program. The Reserve Bank of New Zealand cut its key rate a week ago, and the Australian regulator announced its readiness to reduce the rate. China has repeatedly eased its financial policy in the second half of the year and intends to continue on this path. The head of the Bank of England, who six months ago promised that the issue of tightening policy would be relevant in the winter, said the day before that raising rates is now irrelevant. The Russian Central Bank has also reduced the rate more than once this year and is ready to lower it at its upcoming meetings.
Implications for the global economy
An increase in the US Federal Reserve rate could lead to increased economic instability both in the United States and in the world. For the United States, this step could mean problems with the labor market, a slowdown in inflation, and a freeze in wage growth. The International Monetary Fund warned about this, among other things. In addition, a rate increase could cause a further strengthening of the dollar and, in turn, a significant drop in exports.
The tightening of the Fed's policy will also hit ordinary Americans, because the increase in the rate will force large capital to pay more for an interbank loan, and this in turn will raise the cost of loans for consumers in the banks themselves.“Raising US lending rates would jeopardize the renewal of $17 trillion in private loans, of which 82% are mortgages and $1.3 trillion are student loans. American consumers will no longer be able to earn money. Their assets to their income are already at the highs of the mortgage crisis of the 2000s. To convince the bank that they will return the money, American consumers will begin to save on non-essential goods, including consumer electronics and new clothes,” expects Mikhail Krylov from Golden Hills-Capital Investment Company.
However, China may suffer even more. The Fed's rate hike promises a decline in US demand for imported goods. And the worst situation will be in China; China makes money mainly from selling its goods in the United States.
The strengthening of the dollar is already leading to the withdrawal of capital from emerging markets, including China, which results in the need to devalue the local currency. American dollars issued as part of quantitative easing programs ensured an increase in American incomes and stimulated domestic consumption. Americans' expenses exceed real incomes by $2.5–3 trillion a year, notes Mikhail Khazin, president of the Neocon group. Real average wage in the country is at the level of 1958, and everything above was provided by money issue, the expert explains.
China, in turn, lives on issuing dollars. He needs to invest about 2.5–3 trillion dollars annually in the domestic market, Khazin notes. Therefore, tightening monetary policy could hit both the US and the Chinese economy.
By the way, Russia may even try to make money from this whole story. “The seemingly bottomless US market will now begin to shrink. We see this as a favorable opportunity to position the Eurasian market as an alternative to the American one. To do this, you just need to get the sanctions lifted,” says Krylov.
Consequences for Russia
The Fed's steps will not have a direct impact on Russia. However, the indirect impact through the strengthening of the dollar and falling oil prices may be enough for a new decline in the Russian economy.
In anticipation of the Fed's decision, the dollar has already strengthened significantly, and, as a result, dollar oil prices have fallen. The strengthening of the dollar provokes a depreciation of all other assets that are valued in dollars, including oil prices.Since the Fed began hinting at raising rates at the end of 2013, the ruble has been under constant pressure. “Only part of the fall of the ruble is explained by geopolitics, the rest is the rise of the dollar and the outflow of capital from emerging markets,” notes Alexander Kuptsikevich.
“Oil is likely to return to its 1998 lows. At current prices, this is about $18 per barrel. In this case, the dollar will jump up to a hundred against the ruble. Confidence in the dollar will be restored, but at what cost? It is quite possible that this will be a Pyrrhic victory,” says Mikhail Krylov.
Other experts do not expect an initial major market reaction to the Fed rate hike. A minimal increase and soft rhetoric may even support risky currencies such as the ruble, Ivan Kopeikin from BCS Express does not exclude. But subsequent statements and forecasts can have a much more serious impact on stock assets.
“It is unlikely that the Fed’s decision to raise rates will be an incentive for a strong weakening of the ruble. Perhaps, with the current high level Given the volatility of the Russian currency, such expected news will not cause a reaction that stands out radically from the background of the usual market “noise,” believes Vitaly Manzhos, senior analyst at Obrazovanie Bank.
However, the strengthening of the dollar at current heights, even without sharp jumps in Russia, also does not bode well. In September–October, the Russian economy showed the first signs of slowing down, which gave a chance for a small but GDP growth in 2016. However, the strengthening of the dollar and the decline in oil prices below $40 may not allow success to be consolidated. In this case, we should expect a fall in stock indices and even an increase key rate.
“There may not be strong consequences for the budget at the first stage, since the fall in oil prices will be compensated by the same weakening of the ruble. But this threatens business with a deterioration in business activity, which in the future, of course, will affect budget revenues,” says Alexander Kuptsikevich. According to export estimates, each ruble in dollar terms costs the Russian budget about 90 billion rubles per year.
A strong dollar also threatens to increase costs and reduce profits for Russian enterprises, which depend on imported components. Inflation will not slow down, as the Central Bank of the Russian Federation now hopes, but will accelerate.
However, there is also a third scenario. It cannot be ruled out that raising the Fed rate, if not immediately, then gradually will lead to a weakening of the dollar. At least, this is what historical parallels suggest. “Over the past 25 years, the Fed has started a tightening cycle twice. Therefore, if we look at the analogy with 1994 and 2004, when the Federal Reserve carried out the first rate increase, there was a decrease in the dollar index. It is likely that this will happen this time too,” says Irina Rogova from Forex Club Group of Companies.
“Looking ahead to the six months following the Fed rate hike, the dollar could remain under pressure. The ruble, naturally, against this background may receive moderate support. Moreover, oil may also show some growth, since this energy carrier is denominated in dollars,” says the expert.
“We would venture to assume that following the meeting, the dollar will decline slightly, returning the euro/dollar pair above 1.10. This gives the ruble a chance to go below 70 per dollar,” says Alexander Kuptsikevich.
For Russia, in this case, it is important how much the dollar falls. A strong subsidence of the American currency is also unprofitable for us. In the event of a significant strengthening of the ruble, Russian goods exported may become less competitive. However, oil revenues will increase in this case. Although there is a flip side to the coin - low prices oil prices are stimulated by structural changes in the commodity economy.
The best option for the Russian economy would be stability in the foreign exchange market. However, until the Fed clearly decides on its future policy, this is unlikely.
The US Federal Reserve System (FRS) on Wednesday, December 19th last time will make a decision on the base interest rate in a year. According to analysts surveyed by Forbes, the Federal Reserve will raise rates, as the market expects, despite a noticeable drawdown in the American stock market.
Based on the values of futures for fed funds rates, it is highly likely that the rate will increase at the December meeting, explains investment strategist at BCS Premier Alexander Bakhtin.
The market has set a scenario for an increase in the rate by 25 basis points to 2.25-2.5% per annum, and all current macroeconomic data from the United States indicate that the Fed will not take another pause in tightening monetary policy, says Aton’s leading strategist Andrey Kaminsky.
In November, US unemployment remained at 3.7%, the lowest level in almost 50 years, and inflation was 2.2% in annual terms - even higher than the Fed's target of 2%.
Even the emerging correction in the American stock market will not stop the Federal Reserve. Since December 13, all major US indices have shown strong declines: the S&P 500 fell by 4%, the Nasdaq by 4.7%, and the Dow Jones 30 by 4%.
Since the American regulator, when making a decision on the rate, relies on the dynamics of macroeconomic indicators, it has no reason yet to change course due to a fall in quotes, Igor Klyushnev, head of the trading operations department of Freedom Finance Investment Company, is sure.
What will happen to the market and the dollar?
The rate increase is an expected decision, and current securities quotes have already reflected its impact, says Klyushnev. “The decline in indices may temporarily intensify after the publication of the Fed decision, but it will not last long,” says the financier.
For investors, the statements made by Federal Reserve Chairman Jerome Powell will be more important. Analysts expect the rhetoric to soften and hints at a slowdown in rate increases.
The receipt of such signals will have a positive impact on the American market and may lead to an increase in quotes, but at the same time weaken the dollar exchange rate against major world currencies, Klyushnev notes.
If the Fed tightens its rhetoric - and such a scenario cannot be ruled out - the market will face a difficult time. “The United States has set a course for strengthening the dollar, attracting capital from developing countries and increasing the yields of its debt securities, so a gradual increase in rates is what is needed to achieve both economic and political goals,” says Alor Broker analyst Alexey Antonov.
In his opinion, after the rate increase, the S&P 500 index will continue to decline to a level of 2,400 points, the euro-dollar pair will tend to 1.1 over the six-month horizon, and towards parity over the next year, if the current Fed policy is maintained.
Impact on Russia
If the Fed's rhetoric softens positive sentiments American investors will gradually spread to other capital markets, including the Russian stock market, says Anton Kostin, asset manager of Sistema Capital Management Company.
The Fed's policy may ultimately affect the ruble exchange rate and the yield of Russian securities. “The rise in rates in the US is forcing the Russian Ministry of Finance to raise the OFZ yield in order to restore the narrowing gap between the yield of bonds in dollars and in rubles. A decrease in the difference between ruble and dollar yields would be a signal for foreign investors to sell OFZs, and this would lead to a sharp weakening of the ruble,” explains Igor Klyushnev.
According to the analyst, the Fed’s decision will not in any way affect future decisions on the Central Bank’s key rate. “On December 14, the Bank of Russia raised the rate in advance, even before the Federal Reserve meeting, so as not to provoke an outflow of investors from the OFZ, since it is known that the Federal Reserve is highly likely to raise the base interest rate. However, after the Fed meeting, actions to change the key rate will not be required,” explains Klyushnev.
However, if the Fed rate hike cycle continues, the dollar will strengthen, and the ruble exchange rate will see a noticeable decline. According to Alexey Antonov, the dollar to ruble exchange rate will exceed the 70 ruble mark even before the new year, and after the Christmas holidays the fall of the ruble may intensify.
On Wednesday, July 27, the US Federal Reserve System (FRS) will announce a decision on the base rate. The head of the regulator, Janet Yellen, and her colleagues will determine the further monetary policy of the United States. Its tightening - that is, raising the rate - will lead to a collapse in oil prices and a fall in the ruble exchange rate. Lenta.ru answered five main questions about the Fed’s actions.
What is the Fed base rate?
The base rate, or the Federal Reserve Funds Rate, is the percentage at which banks provide unsecured overnight loans to each other (that is, for one day) from excess reserves. Formally, the rate is set at open market. But in fact, the Federal Reserve can influence its level by setting a target. Now it is 0.25-0.50 percent.
At the same time there is discount rate, under which the Fed allocates money to banks per day directly from own funds. It is usually higher than the basic one (in this moment- 1 percent). The discount rate is mentioned much less often simply because it is not as “popular”: financial organizations view the Federal Reserve as a lender of last resort and turn to it only in cases of emergency.
In addition to rates, the Fed has several other tools at its disposal. The so-called quantitative easing, for example, implies the massive purchase of US government bonds to pump up financial system money. Additionally, at the height of the 2008-2009 crisis, the Federal Reserve purchased corporate bonds to provide real sector companies with access to funds when banks had virtually stopped lending to them.
How does the Fed rate affect world economy?
For banks located in the system, the opportunity to quickly borrow money for short term is of great importance. If the federal funds rate is low, then credit institutions manage their available funds more calmly, more actively distributing loans to other banks and the real sector. This, on the one hand, increases economic activity, on the other, provokes an acceleration of inflation.
Therefore, the Fed uses this tool depending on economic conditions. In the event of recession, stagnation or weak economic growth, the rate is lowered to stimulate lending and the economy. Under normal dynamics, the rate is increased to avoid accelerating price increases and overheating the economy.
Since the USA is one of the largest economies in the world with enormous financial market, and the dollar is the main reserve currency, then the Fed rate affects everyone. An increase in rates leads to a massive exodus of investors into American assets, which means a strengthening of the dollar and a decline in commodity prices.
Is the current rate low or high?
The period of low, near-zero rates has lasted for almost eight years. A generation will soon grow up that has not seen any other financial policy of the American regulator. In fact, by the standards of any past era, this situation is unique. Before 2008, the rate had dropped to 1 percent only once—in the early 2000s, after a massive stock market crash caused by the collapse of Internet companies—and then only briefly.
Now there are reasons for a soft monetary policy. The 2008 financial crisis was one of the worst in history, shaking the global economy to its core. Many banks never fully recovered. A return of rates to the normal levels of the mid-1990s or 2000s could trigger another disaster.
Even the current ultra-low interest rates, however, have not helped the United States reach the levels of ten years ago. On the other hand, the semi-depressive state of the economy curbs inflation, which makes it possible to maintain near-zero rates for such a long time.
Previously, it was believed that such a financial policy could inflate financial bubbles and thereby create conditions for a new collapse. This view is now being questioned. The Fed today is a pioneer in learning economics in practice. There is no historical precedent for a zero-rate policy.
What is the probability of the rate changing this time?
Very small. The chance of a rate hike of 0.25 percentage point or higher does not exceed 2.4 percent, futures indicate. And there are enough reasons for this. First of all, the state of the American economy continues to cause concern among financial authorities. According to Kirill Kononovich, an analyst at the investment company Exante, the May report on employment in the United States and the number of jobs created was a failure.
Ilya Frolov, senior manager for research and analysis of industries and capital markets at Promsvyazbank, believes that the rate will not be increased until the end of the year.
“Despite the slight recovery in the US economy in the summer months, we see a number of obstacles that will not allow the Fed to raise the rate - the heterogeneous state of the labor market, the absence of pronounced inflation risks, weakness in industry,” he said in an interview with Lenta.ru .
In addition, Janet Yellen is now looking back at the state of affairs in the world. And it is even further from ideal than in the USA itself. “The possible contribution of Brexit to the slowdown in the global economy and instability in markets (primarily developing countries) is still unclear. Raising rates in the US will lead to an outflow of funds from Europe and the UK,” explains Kononovich.
To this it is worth adding the difficult situation with bad debts in Italy - this is a new threat to the eurozone and the European Union. All this forces the Fed to be more careful with any changes in monetary policy.
What will happen to oil and the ruble?
If, following the results of this or the next September meeting, the Fed nevertheless raises the rate, then the dollar will strengthen first. With all the ensuing consequences.
“What would investors prefer: receiving negative returns on low-risk bonds (like German ones) in Europe or investing in American securities with the same level of risk and higher returns (and potentially benefiting from the rise in price of the dollar against the euro)? Hence the increased demand for American currency. Under these conditions, the cost of commodity assets will decline - demand for many of them, including oil, remains limited, and supply remains excessive,” notes Kirill Kononovich from Exante.
At the same time, Ilya Frolov from Promsvyazbank believes that we will not see a direct impact on oil prices. In the hydrocarbon market, the main role is now played by fundamental factors - increased production and increased drilling activity in the United States, as well as overstocking of petroleum products in key markets.
In general, Kononovich points to the strong influence of the Fed rate on the Russian economy. “Essentially, the Fed rate is a measure of the cost of lending around the world. Even under sanctions, external borrowings by Russia and Russian corporations are tied to the global level of interest rates,” the analyst comments. If the cost of lending in the United States increases, it will also increase for Russia.
And yet experts are confident that the rate will not be increased. Therefore it is worth paying Special attention to the Fed's comments issued following the July 27 meeting. Their publication will also affect the market.
“If the comments turn out to be tough and indicate that the rate is likely to rise before the end of the year, then we may see a wave of sales in high-risk assets - these include oil, as well as a strengthening of the dollar on the international market. foreign exchange market. This will lead to a deterioration in investor attitudes towards Russian shares and the ruble,” concluded Bogdan Zvarich, an analyst at the Finam group of companies.