The US Federal Reserve’s decision to keep interest rates unchanged resonated negatively in Middle East markets. The interest rate’s fate is hanging in the balance amid controversial statements from decision-makers at the Fed.
Point of view
We warned that the US economy will weaken once the Fed stops QE. This is what we see now and what was also seen after ending QE1 and QE2, after the financial crisis.
Last December, the intention was to raise interest rates by June. Since January, however, it seems that patience is the key, as last week the Fed advocated maintaining the current interest rate for a longer period of time.
Positivity faded in the aftermath of Fed statements, while question marks then emerged about the feasibility of possible rates hikes. At the same time, negative signs appeared in the Middle Eastern markets.
Policy makers at the Fed’s ‘Open Market Committee’ were reticent about interest rate increases last week, opting to keep the current position for a longer period.
Shortly after announcing its intention to hike in June, the Fed retreated from that positive tone to a dovish one.
The timeline for an anticipated increase has now been pushed back to the end of the year.
The surprise was that for the first time in ten years the US central bank referenced international developments including the global economic slowdown and falling oil prices. These, it said, have adversely affected the prospects for US economic growth.
The latest economic data, which showed negative figures for this month, has pushed the FED to request more time to achieve the desired inflation rate of 2 percent.
Officials said any decision on interest rate hikes would remain dependent on what the economic data of upcoming months will reveal.
While it remains a subject of deep debate, the Fed has not provided a definitive answer to questions investors want answered: When will the move be and what is the next step?
The Fed’s statement of a delayed hike, with its implications for money supply encouraged the markets and Wall Street ended the week on a high.
In the Middle East, however, the reaction to the overall negative tone of the Fed comments brought Gulf markets down.
Analysts pointed out that the Middle East/North Africa markets are particularly affected by the movements of the world’s central banks, mainly the Federal Reserve.
Geopolitical tensions in the region and, most importantly, a drop in oil prices, also contribute to changes which eventually lead to all global economies being affected.
Middle East insight
For an insight into developments at the Fed, Daleen Hassan spoke to Nour eldeen Al-Hammoury, Chief Market Strategist at ADS Securities in Abu Dhabi.
Daleen Hassan, euronews
The Fed retreated quickly again, it seems there is uncertainty among decision makers? Why is that?
Nour eldeen Al-Hammoury, Chief Market Strategist, ADS Securities
This is what we warned about here on euronews in December, in the previous season of Business Middle East. We noted back then that the global economy and the US economy are not on the right track.
That’s why we are not surprised by the FEDs’ retreat. However, in the current situation, there is no inflation pressure in the US.
In fact there’s what’s called ‘disinflation’, which might lead to deflation in the future, especially as oil prices remain lower. And until now there are no clear signs of a recovery of this huge oil price drop.
Moreover, we should not forget that about 88 percent of the latest US economic releases in February were disappointing, while only 12 percent came in positive.
Therefore, there is no major reason for a rate hike any time soon.
In spite of continuing negative data, why did the Fed originally intend to raise interest rates next June? Could this affect their credibility?
Nour eldeen Al-Hammoury
The Fed hinted at a potential date to raise interest rates, the hints were based on future expectations. However, here at ADS Securities we warned that the US economy will weaken once the Fed stops QE. This is what we see now and what was also seen after ending QE1 and QE2, after the financial crisis.
But the Fed always tries to maintain credibility by staying on the safe side, being careful with its words and using conditional language. For example, in its statements the Fed says things like ‘If the economic data keeps on rising this might lead to a rate hike sooner’, meaning if any negative data shows up, just as it has now, the Fed can easily change policy without damaging its credibility
Let’s look at Middle East/North Africa markets, why did we see a negative reaction last week after the Fed meeting? Are there any other factors behind this?
Nour eldeen Al-Hammoury
For the first time in more than 10 years, the Fed mentioned ‘international developments’ including Asia, Europe and the US, and for sure the decline of crude oil prices.
This fact of course has a notable impact on the Middle East.
However, after the Fed statement, the markets were volatile over the interest rate hints and closed in red, for many reasons. The earnings season wasn’t perfect, the latest numbers released in the Gulf were disappointing, many companies missed their targets and the earnings per share came in lower.
Moreover, the recent developments between Egypt and ISIL in Libya increased fears for another regional war, which led to this sell-off.
The next Federal Reserve meeting takes place on March 17, 2015, when they will discuss monetary policy .
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