No surprises expected from the US Fed

Thu, 30 Oct Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

The US Fed's policies are keenly watched by global markets with good reason. The Fed, with its monetary tools, influences interest rates in the US and around the world. As the US dollar is the world's reserve currency, the interest rate on dollar denominated debt, is of paramount importance. By intervening in the US bond markets with newly printed money, the Fed manipulates interest rates in the US. It keeps them artificially low by participating in the bond market as a buyer. This keeps demand for debt (and thus bond prices) artificially high. Conversely, interest rates stay artificially low as bond prices and interest rates are inversely related.

The Fed has, in this way, helped the US economy come out of every recession since the great depression in the 1930s. However, these rescue acts come at a cost. The newly printed money eventually makes its way into the economy in the form of higher prices (inflation). It also encourages reckless speculation in the stock markets. As long as the US economy was innovative and progressive, people did not complain. After all, their incomes were rising too! In fact US politicians encouraged this process as it helped them please their supporters. However, the party had to end sometime and it did in 2008. That's when the whole world realised that without ultra low interest rates, the US economy was essentially bankrupt! What was the Fed's response to the worst recession since the great depression? Print more money of course!

The program called Quantitative Easing (QE) has pumped an unprecedented amount of money into the global economy. Consider this: the Fed's balance sheet has grown to a mind blowing figure of US$ 4.4 trillion (1 trillion = 1,000 bn)! After its meeting on 28-29th October, it is expected to announce the end of the QE program (after 3 successive rounds). But will it stay away from more QE in the future? Well that's anyone's guess! Also, it's important to note almost nobody believes that they will actually increase interest rates any time soon. So it would be inappropriate to expect the Fed to announce anything that will spook the markets. Let's face it. The US economy is addicted to cheap credit. If the Fed were to raise rates, it will cause a mountain load of problems for the economy. We don't expect the Fed to rock the boat, at least not yet.