Jakarta, CNBC Indonesia – The central bank of the United States (US) or known as the Federal Reserve (The Fed) will announce monetary policy on Thursday (16/12) in the early hours of Indonesia time, or less than 24 hours.
Global financial markets reacted before the announcement, global stock markets slumped, gold prices also fell.
The US stock market (Wall Street), which is the mecca of world stock exchanges, has slumped for two consecutive days. On Tuesday, the Nasdaq index fell more than 1%, the S&P 500 was minus 0.75%, and the Dow Jones was down 0.3%. Wall Street’s performance was even worse at the start of last week.
Indeed, there is a factor in the spread of the Omicron virus which is feared to trigger a global economic slowdown that makes global stock markets slump. However, the Fed is also one of the triggers, because it is expected to accelerate the tapering or reduction in the value of the asset purchase program (quantitative easing/QE) as well as raising interest rates earlier.
This means that the monetary stimulus will soon be reduced, which will become a negative sentiment for the stock market.
Interestingly, when the global economy was threatened to slow down due to Omicron, global stock markets were slumping and inflation was high, the price of gold actually fell by almost 1% on Tuesday’s trading to US$ 1,770.17/troy ounce.
When gold, which is a safe asset and a hedge against inflation, goes down along with stocks (risky assets), it certainly reminds us of taper tantrum which happened in 2013. Gold was one of the worst assets at that time, its price continued to decline until 2016.
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Tapering What the Fed did in 2013 triggered turmoil in the financial markets called taper tantrum, at that time all assets fell, and the US dollar strengthened sharply. On Tuesday’s trading, the US dollar index also rose 0.25% to 96.559.
The Fed has started doing tapering last November with a value of US $ 15 billion every month. Central bank QE value at most powerful in this world of US$ 120 billion, that is, until QE becomes zero it will take 8 months.
Tapering what the Fed did was responded calmly by the market, there was no turmoil at all. This means that the chairman of the Fed, Jerome Powell and his colleagues succeeded in reducing the occurrence taper tantrum.
However, all that changed when inflation in the United States shot to a nearly 4-decade high, the Fed plans to accelerate the normalization of its monetary policy.
Some analysts see the market has anticipated this, if it is true then the taper tantrum is likely not going to happen.
The Fed is expected to increase tapering to $30 billion per month, so QE will be zero within 4 to 5 months.
After QE is complete, the next step is to raise interest rates.
A survey conducted by Reuters showed the majority of economists expected interest rates to be raised in the third quarter of 2022, but there were some who saw an increase in the first quarter of 2022 which means in the next 3 months.
The survey was conducted from December 3 to 8, and shows the Fed is expected to raise interest rates by 25 basis points to 0.25% – 0.5% in Q3-2022. Then, there will be 3 more increases, namely in the fourth quarter of 2022, and the first and second quarters of 2023.
The Fed’s interest rate (Fed Funds Rate/FFR) will be at 1.25% – 1.5% by the end of 2023.
The scenario of two to three interest rate hikes next year has been anticipated by market players as seen on the CME Group’s FedWatch device.
However, the story will certainly be different if the Fed raises interest rates in the near future. The results of a Reuters survey showed as many as 16 economists see the first rate hike will be done in the second quarter of 2022, while 5 economists expect an increase in the first quarter of 2022.
In comparison, the same survey conducted one month earlier showed only 5 economists who saw interest rates raised in the second quarter of 2022, and only one person who saw an increase around January – March 2022.
NEXT PAGE >>> Here’s the Bad Impact of Taper Tantrums for the Domestic Financial Market
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