The Fed raised rates for the fourth time in a year: what will this mean for Russia? Rate for an increase. What will happen to the dollar after the Fed’s decision. The meaning of the Fed’s rate on exchange rates.
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 in the long term (currently estimated at about 4%), as well as to 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.
Given the reluctance of the European Central Bank to rush to raise the key rate, as well as taking into account expectations for the US economy, the euro-dollar pair may fall 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 are unlikely to allow the ECB to delay normalizing rates, and fiscal stimulus in the United States will be extended over time, which will significantly smooth out its impact on the American economy , which is in a mature growth phase.
In general, the beginning of next year looks quite rosy for the stock and bond markets of both developed and developing countries. Risk appetite will be maintained at a high level, which will push stock indices to new highs, and inflows into high-yield assets can be converted into strengthening 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.
The Open Market Committee of the US Federal Reserve System (FRS) raised rates for the second time in a year. Following the meeting that ended on June 13, the rate increased by 25 basis points to 1.75-2%. The Federal Reserve also expects rates to rise twice more this year. Previously, only three increases were expected per year.
The Fed is guided by the fact that unemployment and inflation are exceeding target levels faster than previously predicted.
A so-called "dot plot" of hikes released Wednesday showed eight Fed policymakers expected four or more quarterly rate hikes throughout the year, up from seven during the previous forecast round in March, .
The normalization of the Fed's monetary policy leads to a strengthening of the dollar against other currencies and an increase in the yield of US Treasury bonds. Together with an increase in borrowing, this gives the effect of a dollar vacuum cleaner - investors are withdrawing funds from emerging markets.
“The ruble, like other currencies of developing countries, is feeling pressure from the “American”, which is strengthening against the backdrop of the Fed withdrawing dollar liquidity from the market and investor expectations regarding tightening monetary policy in both the US and the EU. All this forces players to withdraw money from risky assets, exchange them into foreign currency and invest in reliable American and European securities,” explains , an analyst of the social network for investors eToro in Russia and the CIS.
The American currency still has room for further strengthening. In the event of further tightening of monetary policy, it may well “please its holders with growth course"adds the analyst.
The trend for the strengthening of the US dollar across the entire spectrum of the market, including in relation to the Russian ruble, has been very clear since the beginning of the year, agrees the expert of the International Financial Center.
In addition to the strengthening of the dollar, the ruble was hit hard by US sanctions, and in the future this factor will put additional pressure on it, she adds.
Sanctions imposed in early April against , and their companies ( and ) caused the flight of foreign investors from Russian assets.
According to the Central Bank, as of May 1, 2018, the share of non-residents in Russian federal loan bonds amounted to 2.22 trillion rubles. or 32.3% of the total face value of issued securities. As of April 1, the figures were 2.351 trillion rubles. and 34.5% respectively. Thus, in April, non-residents got rid of securities worth 131 billion rubles.
According to the assessment, elevated levels of corporate debt may increase concerns about maintaining financial stability and affect investment. Since the global financial crisis, corporate debt—and, in some countries, foreign currency debt—has been growing rapidly, increasing corporate vulnerability to rising borrowing costs.
“Policymakers in emerging and developing economies need to be prepared for possible outbreaks of instability in financial markets as monetary policy normalization accelerates in developed countries,” said Ayhan Kose, director of the World Bank’s Economic Outlook Department.
Rising debt levels increase countries' vulnerability to higher interest rates. “This underscores the need to create cushions against financial shocks,” says a World Bank representative.
The management of the Bank of Russia, headed by it, has repeatedly stated that it does not see a problem in the outflow of funds from non-residents. There will be no spending of gold and foreign exchange reserves (their volume as of June 1 amounted to $485.6 billion) to maintain the ruble exchange rate.
While expensive oil is preventing the dollar from going beyond 65 and further to 70 rubles, quotes which remain around $75 per barrel of Brent. But as early as next week, participants in the + deal (OPEC countries, Russia, etc.) may soften oil production quotas, which could lead to a drop in prices. Along with oil, the ruble will also fall in price. Given the Federal Reserve's planned rate hikes, the prospects for the Russian currency are gloomy.
Following the meeting of the Open Market Committee, the Federal Reserve expectedly increased the base interest rate in the United States by 25 bp, to 1.75-2%. The American regulator explained the decision by the fact that the country's economy and economic activity are demonstrating steady growth rates, and the labor market continues to strengthen. “Family expenses increased, while investment in fixed assets continued to grow,” the communiqué from the Committee meeting noted.
Still, Fed Chairman Jerome Powell noted that “concerns about changes in trade policy are growing. We're starting to hear about this from companies delaying investment and hiring."
The Fed also emphasized that the country's monetary policy remains accommodative. The Committee is targeting inflation at 2% and, judging by the statement of Federal Reserve Chairman Jerome Powell, is not afraid of its reduction. The Fed is expected to raise rates two more times by the end of this year. Next year, the Fed is scheduled to raise rates three times.
An increase in the Fed key rate means an increase in prices for goods and services in the medium term, says Georgy Vashchenko, head of the operations department on the Russian stock market at Freedom Finance Investment Company. Loans in the economy will become more expensive. But the effect on the American economy and other countries will be different. Rates are low in the US right now, and international banks are funded in the US whenever possible. Commodity producers in Russia, Saudi Arabia and other countries prefer to borrow in dollars because their revenue is in dollars.
The cost of their production will increase due to rising costs of equipment and servicing loans, and profitability may decrease due to competition with American manufacturers. Oil production in the United States is growing, it has already reached almost 15 million barrels. per day, an increase of 12% compared to last year.
How can one not understand?
For Russia, as for other countries, raising rates in the United States has more negative consequences than advantages, says Georgy Vashchenko. Russia has a lower investment rating, higher inflation and more risks, which is associated with the volatility of prices for raw materials, dependence on foreign markets and raising capital. Accordingly, investors want to receive O higher profitability compared to dollar instruments.
The Central Bank is forced to maintain the rate at a high level in order to ease pressure on the ruble. And a rate above 6% hinders economic growth. Despite the rise in oil prices to almost $80 per barrel and the relative stability of the ruble, as well as low inflation, GDP growth this year will probably be less than 2%, Georgy Vashchenko expects. Russia is among the laggards among the group of BRICS countries. The Central Bank will most likely leave the key rate unchanged on Friday.
In general, the Fed’s increase in the reserve rate is a long-term process that can be observed in the last few years, recalls, in turn, the general director of the Kharitonov Capital Investment Company, Maxim Kharitonov. The American economy is actually doing well, mainly as evidenced by rising inflation and falling unemployment. This is quite logical after the extensive quantitative easing (QE) programs, which by historical standards ended quite recently, and consisted, in simple terms, of pumping money into the economy through the mechanism of money emission.
According to the analyst, this mechanism is inertial, it has accelerated quite strongly, raised the prices of many assets, and therefore now the Fed is starting to slowly, carefully stop it so as not to overheat the markets. Increasing the reserve rate is one of the methods of slowing down the economy; in simple terms, it makes borrowed money more expensive, which means it reduces the appetite of firms and investors for rapid growth and the risk that accompanies such growth.
What is important for markets is not only today’s specific rate increase, but also the fact that there may be two more such increases this year. That is, the rate could reach 2.5% already this year. And also that in 2019 the rate may be raised another 3-4 times. And we can assume that by the end of 2019 it will grow to 3.5-3.75%. At this rate level, international investors will be inclined to invest in American companies and their securities, especially given Trump's tax reform and new tariffs on raw materials that should give American producers an advantage.
This trend means, explains Maxim Kharitonov, that money that was previously invested in emerging markets will go from there to the US market, as well as the EU. For the ruble and ruble assets, unfortunately, this means the prospect of loss of interest from international investors and speculators. The smaller the spread between the Central Bank key rate (7.25%) and the Fed reserve rate (1.75-2%, and in the future - 3.5-3.75%), the less attractive carry trade operations that support the ruble are. With the Fed rate increase, according to Kharitonov, the ruble will fall lower and lower against the dollar. By the end of 2018, you can expect 68-69 rubles per dollar, and in 2019, it will go beyond this range, to 73-75 rubles.
) The United States raised its base money market rate for the third time in 2018 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 unemployment rate in the US remained low, the number of jobs grew, as did household spending.
“Consumer spending and business fixed investment grew at a rapid pace,” the document notes.
At the same time, annual inflation remains around the target of 2%.
The Fed's 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 has increased recently. At the end of 2015, the Fed raised the base interest rate from near zero to 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.
As the chief analyst of BCS Premier explains,
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.
At the same time, US stock indices add 0.3-0.7% on news of an increase in the base rate.
Experts say that the current decision of the Federal Reserve has already been built into the current quotes, so it is unlikely to affect course dollar.
However, if the US Federal Reserve decides to tighten monetary policy in the near future, this could lead to a depreciation of the ruble.
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.
An analyst at Freedom Finance says that
The aggressive rate hike by the US Federal Reserve leads to the draining of capital from emerging markets and this, naturally, puts pressure on the currencies of developing countries.
Meanwhile, the head on Wednesday, September 26, advised Russians not to make emotional decisions about buying and selling currency.
The minister also assured the people of Russia that policies and governments will ensure sustainable development of economic indicators. He emphasized that Russian macroeconomic policy is aimed at ensuring long-term stable exchange rate dynamics.
Oreshkin confirmed the forecast for the dollar exchange rate at the end of the year, previously approved by the Ministry of Economic Development, at around 64 rubles.
“Now the rate has dropped below 66 rubles per dollar. Our forecast for the end of the year, as I said earlier, is around 64 rubles per dollar. These are the levels where the ruble should fundamentally be in the current conditions, so around these values the exchange rate should be expected until the end of this year,” Oreshkin said.
The official dollar-ruble exchange rate, set by the Central Bank on Thursday, was 65.76 rubles, according to Central Bank data.
This will drop the "wooden" to 70 per dollar
The US Federal Reserve decided to raise the base interest rate by 0.25 percentage points. Now interest in the dollar as an investment instrument will increase and investors will begin to use it more actively, transferring funds from other sectors. For oil, this is another reason for the price to fall - if the Fed continues the same course regarding the rate, then the barrel risks falling to $45. Which, in turn, will negatively affect the Russian currency, which in the medium term will fall in price to 67-70 rubles per dollar.
A week before the Fed meeting, almost all experts unanimously said that the agency’s board of directors would make just such a decision. Moreover, the head of the American regulator, Janet Yellen, had previously announced a similar decision, citing the positive dynamics of the main US macroeconomic indicators.
According to the President of the Moscow International Monetary Association, Alexei Mamontov, the consequence of raising the Fed rate will be an increase in investments in American assets, which will hit the financial situation of most developing countries.
First of all, oil-producing states, whose economies are heavily dependent on income from the export of raw materials, will suffer. Market players are reorienting their investments from the mining sector in favor of dollars. Stock speculators will add fuel to the fire by concluding short-term contracts for the purchase and sale of hydrocarbons in the hope of winning back the last positions gained by oil. “Prices for “black gold” will inevitably slide down and in the near future will find themselves below the psychological mark of $50 per barrel,” Alexey Mamontov is sure.
This is not the last factor that can drop oil prices. According to Ruslan Grinberg, scientific director of the Institute of Economics of the Russian Academy of Sciences, we must not forget that Janet Yellen’s department is making its decision in conditions where the oil market is already in a very unfavorable situation. At the moment, there are all the prerequisites that the solidarity of the OPEC countries regarding the position on reducing production, hard-won at the end of last year, is beginning to collapse. The most influential member of the cartel, Saudi Arabia, is no longer sure that it chose the right direction then. American companies skillfully took advantage of the decline in production of most oil market participants and revived their shale projects. Riyadh has already made it clear that at the May OPEC meeting, disagreements that have accumulated within the cartel may surface. This will serve as an additional incentive to break the memorandum signed by the countries.
Following oil, the value of the currencies of countries that are in one way or another tied to the extraction of mineral resources will also decline. Including Russia. The ruble, as most experts believe, is now excessively overvalued. Unlike oil, whose quotes have decreased by an average of 8-10% since the beginning of March, the value of the Russian currency has lost only 2% in value over the same period. “In the coming trading sessions that will follow the Fed’s decision, the dollar will add several percentage points and reach the level of 62 rubles,” believes Alexey Mamontov.
And this will only be a short-term effect. In the future, the position of the ruble may shake even more. According to FINAM Group analyst Bogdan Zvarich, the main attention of exchange players will be focused on the comments of the Federal Reserve that accompany the decision on the rate. “In them, investors will try to find hints about how soon the Fed will be ready to continue the rate hike cycle or will take a pause to assess the economic changes caused by the March tightening of monetary policy. In total, this year Janet Yellen’s department plans to make 3-4 similar decisions to raise rates. If investors decide that a further rate increase is inevitable in the near future, this could lead to an additional rise in the dollar and a new fall in oil prices. The ruble will then finally find itself between two fires, and the possibility of its strengthening will be in big question,” the expert believes.
According to Alexey Mamontov, the Fed's continuation of the policy of increasing the interest rate, coupled with a decrease in commodity prices, will bring the dollar to 65-67 rubles by the end of this year. If the negative scenario is realized, it is possible that the American currency will come close to the 70 ruble mark. We can only hope that this will to some extent benefit the Russian economy as a whole, since revenues from hydrocarbon exports may increase in ruble terms. However, such a favorable outcome will depend on the demand for energy resources this year, experts are not yet confident in its growth.
UPDATE: Further events, however, unfolded contrary to many predictions - .
