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Decision day looms as Fed mulls interest rate rise

Business Middle East

Decision day looms as Fed mulls interest rate rise


Ahead of the forthcoming
Federal Reserve meeting Business Middle East sheds light on this key moment for the US and global economies, and assesses its potential repercussions.

The Fed, in one of its most important meetings of the year, is evaluating the strength of economic data from the first half of 2015. Since the end of the quantitative easing last October, many promises have been made by policymakers about raising interest rates this month. However, the US economic numbers may be in stark contrast to Janet Yellen’s ambitions to increase the interest rates.

Hike on the horizon
Since last December, the Federal Reserve has reiterated its intention to raise interest rates in mid-2015.

During the last meeting, Fed chair Janet Yellen linked the interest rate hike with US economic figures.
However, the International Monetary Fund and the World Bank warned the FED not to raise interest rates before the beginning of 2016.

“The Fed’s first rate increase in almost nine years has been carefully prepared and telegraphed,” said IMF chief Christine Lagarde. “Nonetheless, regardless of the timing, higher US policy rates could still result in significant market volatility with financial stability consequences that go well beyond the U.S. borders.”

Lagarde caution
Lagarde’s remarks were made after an assessment of the financial sector in the US, where the focus was on the risks of instability and appropriate policies, taking into consideration the position of the US dollar against other currencies.

US economic figures since the beginning of the year have been underwhelming despite positive signals for improvement ,
the last earning report of average wages, which reached 2.3%, the highest since August 2013.

The Fed pointed out that the economic slowdown in the first quarter was due to temporary factors. In spite of GDP that slowed down in first quarter data, the Fed still expects to see economic activity continue at a moderate pace.

The Middle East view
For analysis of the Fed’s options and Daleen Hassan spoke to Nour Aldeen al Hammoury, chief market strategist from ADS securities

Daleen Hassan: “Do you think that the US economic figures are enough to raise interest rates? and at ADS securities do you still hold the view that the Fed is likely to be cautious?”

Nour Aldeen al Hammoury:“Its clear that the recent economic releases from the US are not enough for the Fed to raise rates in this meeting. There are many negative economic releases with few positive figures including the Jobs Report.

ADS still agrees with many in the market that the Fed will be more patient before raising rates, especially now that the global economy is slowing down along with the US economy.

“The inflation data from the US is not enough for a rate hike. The YoY Producer Price Index eased to a record low at 0.6% last month, while the Fed target is around 2%, which increases the chances of the Fed keeping the rates unchanged for now. The Fed may wait for next year before raising rates amid falling inflation.”

Daleen Hassan:“If the FED decides to raise interest rates, how do see US and global bond markets reacting?

Nour Aldeen al Hammoury: “The market had a notable decline across the globe recently, with the Greek situation. If the Federal Reserve decides to raise rates, European and US bonds are likely to decline sharply and might be faster than the latest decline, leading bond yields to soar further, which is not good for the Federal Reserve and the European Central Bank.”

Daleen Hassan: “Let’s take a look at the Middle East, how important is the FED’s decision to markets there? What would be the resulting scenarios for the region?”

Nour Aldeen al Hammoury: “As we know, ME equities are very sensitive to global developments. Declining bonds had a slight negative impact on the region’s equities. In the meantime, if the Federal Reserve decides to keep the rates on hold, this would be welcomed by Middle East markets. However, if the Fed raises the rates, this might lead to some negative reaction on the region’s equities as the rising US Dollar may weigh on crude oil, causing falling equities in the region.

“Despite that, opening the door for foreign investors to invest in Saudi market should be another positive catalyst for the region and for Saudi Arabia, which may lead to a notable stabilization, especially now that everyone is looking for large funding to come in.”

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