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Stick or twist: the Fed's interest rate dilemma

Business Middle East

Stick or twist: the Fed's interest rate dilemma



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The US Federal Reserve is facing different daunting scenarios ahead of its crunch meeting on interest rates. The countdown has begun to one of the most crucial decisions for the central bank in recent years.
Amid indications that Fed chief Janet Yellen could stall again on raising interest rates, Fed officials have been out mixed signals.

It is a particularly important meeting for Middle East and North Africa markets, and the Fed’s credibility is also at stake.

Guessing game

Investors are playing a nerve-wracking guessing game. Some indicators point to the Fed raising the interest rate; unemployment fell by its biggest drop 2008, growth rates are positive, defying negate forecasts and surveys shows business conditions as stable.

On the other hand there are worrying signs undermining expectations of a rate hike anytime soon; Inflation remains way below the Fed target with estimates for the next five years at or near record lows, falling oil prices have increased the risk of deflation. The rising dollar is hurting US exports, as is the slowing of the global economy.

The IMF has warned the FED frequently not to rush its decision, Christine Lagarde reinforced the the message at the G20 meeting Turkey: “The FED has had not raised interest rates in such a long time that it should really do it for good if I may say, in other words not give it a try and then have to come back,” she said.

Abu Dhabi view

For an analysis of the Fed quandary Daleen Hassan spoke to Nour Eldeen al Hammoury, chief market strategist at ADS securities in Abu Dhabi. Daleen Hassan “As the Fed meeting approaches many analysts think it will be unable to raise the interest rate now. How do you expect the market to react in both scenarios, I mean an interest rate hike or a delay of the decision?” Nour Eldeen al Hammoury “For the time being we’re not expecting a rate hike by the Federal Reserve next week, as we’ve mentioned before. However, if the Fed did decide to raise rates this would increase panic, at least in the emerging markets, and we may even see a notable decline in global equities.

“On the other hand, if the Fed decided to keep the rates unchanged, this would undermine the Fed’s credibility, as it has been promising the world a rate raise for around a year now.

“The Fed losing credibility would also be a negative factor for the markets for some time, until the Fed policy is clear in the coming months. So it’s a very important meeting this week and traders should read between the lines.

Daleen Hassan “So we can say that the FED is not in a good position right now?” Nour Eldeen al Hammoury “Of course, the Fed is not in a good position right now. This is also what we noted a year ago, that the Fed might not raise rates. The Fed delayed the rate hike many times from March to June to September and now September is likely to be delayed until December. Therefore, the statement is very important and will be key for forthcoming trends.” Daleen Hassan “There’s been extreme volatility in the financial markets recently. To what extent could this affect the Fed’s decision?” Nour Eldeen al Hammoury “We’ve seen many warnings across the globe, from the IMF, from the world bank – even the Fed’s members are not on the same page. The IMF and the World Bank warned the Fed about raising rates, as it might spread panic again.

“Moreover, the recent market turmoil has sent a clear message to the Fed that they are not ready for a rate hike now. We believe that it’s not in the Fed’s interest to increase the turmoil in the markets, as we’ve seen in the past few weeks. And declining inflation figures give the Fed more flexibility to keep the rates on hold for longer.”

MENA invests in real estate

Middle East investments in the real estate sector have reached a historic record, rising by 64% in the first half of this year. London and Hong Kong had the lions’ share of these Arab-led projects.Qatar and the United Arab Emirates are the largest investors in real estate outside the Arab world. After the sharp decline in oil prices Middle Eastern investors are becoming more active in real estate this year

These investments outside the Middle East North Africa region reached US$11.5 bn in the first half of 2015.

The main beneficiary of these investments is London, receiving followed by Hong Kong and New York. This capital is flowing out of the Middle East into real estate globally, mostly to invest in hospitality and luxury services such as hotels and apartments


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