The Open Market Committee of the Federal Reserve System (FRS) of the United States decided to raise the base rate - by 0.25 percentage points, to 0.75-1%. The previous increase in the indicator took place three months ago, in December 2016. Then the regulator gave a forecast that in 2017 the rate would be raised three times - to the level of 1.375% Today, this forecast, which speaks of a tightening of the policy, has been preserved. The increase in the borrowing price of the dollar contributed to the steady growth in employment in the US and the approach of US inflation to the target. The Fed's decision may have a limited weakening effect on the Russian ruble through a possible decline in oil prices.
Following a two-day meeting, the Federal Open Market Committee raised the base interest rate, which was in the target range of 0.5-0.75% per annum, by 0.25 percentage points - up to 0.75-1%. This is only the third rate increase in the last ten years. For the first time during this period, it was raised in December 2015, the second time - in December 2016.
Just a few weeks ago, it was at the March meeting that the market participants considered a rate increase as not a very likely event - however, in recent weeks, the consensus has changed. The head of the Fed, Janet Yellen, and the heads of other reserve banks, hinting at an increase, referred to an improvement in the situation in the economy: the unemployment rate in the United States fell again in February to 4.7% from 4.8% in January (235,000 jobs were created). which is above average). Business indices are at highs, indicating a potential acceleration in growth. Inflation in the US in January accelerated to 2.5% - a five-year high - from 2.1% in December (however, the indicator that the Fed focuses on, personal spending inflation, remains below 2% - in January 1.7%). In addition, the Fed is no longer worried about the impact of global economic problems on the US - eurozone GDP growth has accelerated, and the Chinese economy has stabilized.
Since confidence in the rate hike was almost universal today, the main event was the publication of new Fed macroeconomic forecasts and a possible schedule for the next hikes. The regulator kept its forecast for the growth of the US economy in 2017 at the level of 2.1%, the forecast for inflation dynamics was also left unchanged - at the level of 1.9%. The forecast for unemployment has not changed either - 4.5%. Most members of the Open Market Committee expect two more hikes in the base rate in 2017, to an average of 1.375%.
The new rates in the US will affect the Russian financial market rather indirectly - through their pressure on the price of oil. The International Monetary Fund, in a review prepared for the G20 meeting, does not rule out an acceleration in the outflow of capital from emerging markets due to the Fed's decision. However, this applies to a lesser extent to financially isolated Russia - first of all, we are talking about developing countries with a high level of public debt and an economy closely linked to the US dollar.
Vadim Visloguzov, Tatyana Edovina
The Fed moved the rate up
The US Federal Reserve in December last year raised the rate by 0.25 percentage points - up to 0.5-0.75%. Most members of the Open Market Committee predict that in 2017 it will be raised three more times. Such expectations indicate a tightening of monetary policy - against the backdrop of an increase in inflation in the United States due to the fiscal initiatives of the Donald Trump administration. For the ruble and other Russian assets, the consequences of the rate hike will be limited, experts believe.
On July 26, 2016, a two-day meeting of the Federal Reserve System (Fed) began in the United States, however, the Open Market Committee of the American financial regulator will announce its decision on interest rates on Wednesday, July 27, at 21:00 Moscow time. The decision of the Fed may have an impact on the dynamics of exchange rates and the activities of regulators in other countries.
About how interest rates work and why their changes excite the markets - in the TASS material.
What is the FRS
- The US Federal Reserve System, established in 1913, serves as the country's central bank.
- Its main tasks are the implementation of monetary (monetary) policy by influencing the conditions of monetary circulation and the credit rate, control and regulation of banks, maintaining the stability of the financial system.
- To solve these problems, the Fed uses the so-called open market operations (purchase of government securities, mandatory reserve deposits by banks with the Fed and setting refinancing rates (base) and accounting).
What are the rates
- Discount rate, set by the regulator directly, determines the cost of credit for commercial banks, which is issued by the Fed.
- Wherein refinance rate (fed funds rate), which is key regulated through open market operations. That is, we are talking about the interest on the loan that US banks use when providing their excess funds on credit to other commercial banks experiencing a shortage of reserves. The rate is key because it affects the amount of credit for the end consumer: individuals and legal entities.
- The Fed cannot directly set this rate.
- The regulator sets the so-called target federal funds rate, which is a value or range of values. But banks are not obliged to issue funds to other credit organizations at this particular percentage.
- If the regulator notices that banks are using rates that differ from the target, it resorts to buying or selling government bonds so that the values \u200b\u200bare returned to the specified range or to the specified value.
- The weighted average of bank rates is called efficient the federal funds rate.
Why regulate rates, and what does it affect
- When the Fed wants to lower the key rate, it buys government bonds on the open market: this leads to an influx of funds into the market, makes credit "cheaper" and stimulates investment. That is, lowering the rate contributes to economic growth, creates jobs and, therefore, is used to prevent crises.
- However, an excess of cash can lead to inflation, and to avoid this, the Fed can raise the rate by selling government bonds and artificially creating a cash shortage in the market.
- It is worth noting that it is not easy to regulate the markets, balancing between economic growth and low inflation. Low interest rates can lead to "bubbles" in financial markets and are disadvantageous for many participants in the economic process. At the same time, given high interest rates, there is a risk of economic slowdown, and they are especially inappropriate in a crisis.
Why the decisions of the American regulator are so awaited by world markets
- Since the US is the largest economy in the world, its main indicators and the Fed's adjustment measures have a strong impact on world exchanges and the currencies of other countries.
- Thus, when the rate is raised in the short term, the currencies of developing countries may "suffer", as investors refuse to invest in them in favor of more reliable US government bonds and deposits in US banks, which raise the rate after the Fed.
- The dollar is getting more expensive.
How does the Fed rate affect the Russian economy
- The increase in the Fed's discount rate puts pressure on the currencies of countries with emerging markets, including the Russian ruble.
- The expectation of a rate hike and, accordingly, a strengthening of the dollar did not allow the ruble to strengthen in May, despite the rise in oil prices.
Interesting facts about the American regulator
- The Fed unites 12 regional banks (these banks are located in major cities - Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco).
- However, despite the fact that the Fed is a completely private company in terms of capital ownership, the state plays a significant role in its management, and in general it is an independent federal agency of the US government.
- Independence in work is ensured by the fact that the decisions made on monetary policy do not have to be approved by the President of the United States or any of the executive or legislative branches of government.
- The Fed does not receive funding from Congress. At the same time, the Fed is under his control.
- In 1982, a precedent case was considered in the Court of Appeal: a private individual demanded compensation from one of the Federal Reserve Banks for damages inflicted on him by the state. The Court issued the following verdict: "The Federal Reserve Banks are not government entities, but independent corporations owned by private individuals and controlled at the local level. The Federal Reserve Banks were created to carry out a number of government tasks."
Fed rate dynamics
In the 1950s-1960s. the effective US federal funds rate ranged from 0.5% to 9%. In 1973, the oil crisis led to an increase in the rate of inflation in the country, because of which the target rate was sharply raised from 5.75% to 10.5-10.75%. After falling to a level of 4-7% in the mid-1970s. the rate set records due to a new burst of inflation in 1980-1981. (18-20%). During the 1980-1990s. the rate gradually decreased to a level of about 5%. In 2001-2003, after the accession to the post of US President George W. Bush, the rate was gradually lowered to the level of 1% (set on June 25, 2003) to fight the recession. The target remained unchanged for a year, then was raised again. In 2006, the new head of the Fed, Ben Bernanke, repeatedly raised the rate (up to 5.25% on June 29, 2006) to counteract the growth of the "bubble" in the real estate market. However, the beginning of the global financial crisis forced the regulator in 2007-2008. lower the rate. On December 16, 2008, a record low range was set - from 0 to 0.25%, while Ben Bernanke pursued a policy of quantitative easing (in total, the Fed bought up assets worth about $4.5 trillion). Since then, the target rate has not changed for seven years, and the effective rate has ranged from 0.07% (December 2012, early 2014) to 0.2-0.22% (February 2009, spring 2010). .). In August 2008, the effective rate was 0.14%. In December 2015, the US unemployment rate was 5%, the lowest since February 2008, and GDP growth was projected at 2.8%. In this regard, on December 16, 2015, the Fed changed the rate for the first time since 2008, raising it to 0.25-0.5%. As of July 2016, the effective rate is 0.4%.
The issue of raising the rate this December has already been actually resolved - investor confidence in this decision by the Fed on Monday, according to CME Group, reached 100% . However, the size of the rate hike has never caused so much controversy among both Russian and Western economists. Let me remind you that Jerome Powell, focused on developing the economy, and not on ensuring financial stability (like Jeanette Yellen), is becoming the new head of the Fed, so a sharp change in the paradigm of the Fed's priorities is possible on the eve of his assumption of office. Rate changes may begin as early as December. The consensus forecast of Western brokerage houses is about 25 percentage points from the current rate of 1.25%, while Russian analysts tend to assume more decisive action - up to an increase of 0.5%, explaining this by the fact that the rate lagging behind the index inflation expectations, which currently stands at 2.8%, could lead to an uncontrolled rise in prices.
Given that the Fed's long-term key rate target is 2.75%, Russian analysts are certainly closer to the truth. However, now a sharp increase in the key rate may return increased volatility to the US stock market, which is experiencing historical highs, which, in turn, may result in negative consequences for the medium-term growth of the country's economy. For example, HSBC experts are inclined to assume that such steps can provoke a change in the conservative approach on the part of investors to a more risky one, as it was in the 2000s, which means that the economy can reach the target indicators much faster than the Fed suggests, but the price of this growth may be the subsequent decline. In addition, based on the rhetoric of the Trump administration, the rollback of quantitative easing, which resulted in the United States having the highest external public debt in history and the lowest lending rates in history, is not desirable in light of the tradedeals initiative proposed by the American president (concluding new trade agreements). with international partners, some kind of insurance against a decrease in the growth of the country's economy). A weak dollar is important for the implementation of new trade agreements.
Currently, in anticipation of the Fed's decision, the dollar is growing against all world currencies (to ruble And Euro it strengthens relatively moderately), oil contracts are under pressure and getting cheaper, as cheaper and gold. At first glance, all signs point to an imminent significant decline in the ruble against the dollar - at least, Russian investors and funds investing in Russian assets have already begun to prepare for this. U.S. bond yields decline (to less than 2.8%), tech and energy stocks soar S&P 500 to a record 2659.99. Let me remind you that this year this index has updated its historical maximum for the 59th time.
However, the decline in oil prices is extremely episodic: on December 6, having fallen by 2.6% and 2.3% on the Chicago and New York exchanges, respectively (following the January oil futures, which were traded in the region of $62 per barrel), already on Friday, oil returned to growth again, on the one hand, due to the increased attention of international investors to energy assets (including Russian ones), on the other hand, thanks to the report Baker Hughes, showing a measurable decline in crude oil inventories in US oil storage facilities. The chances that after the announcement Fed decisions, oil will drop significantly, a little - at the moment it is in no one's interests. Gold continues its bearish trend, having already fallen to $1,240, but there are no sharp changes in its market value yet - the owners of gold contracts, apparently, do not expect a significant increase in the rate and are in no hurry to close their positions.
All this indicates that most likely the current fever, which we are seeing in the US market and in Europe, is more like a storm in a glass than preparation for a change in the Fed's monetary policy. This means that the ruble retains all chances to remain relatively stable against the dollar. As far as the euro is concerned, much depends on ECB meetings, which is scheduled immediately after the Fed board meeting. Most likely, the European Central Bank will leave everything unchanged.
Of the 100 economists surveyed, 95 expected a 0.25 percentage point increase in the key rate. According to futures data on the CME Group (a group of the Chicago Mercantile Exchange), on the day before the meeting, the probability of a rate increase of 0.25 percentage points. was 93.5%.
“Most investors have long been confident in the tightening of the monetary policy of the US Federal Reserve at the June meeting, which means they took this factor into account when making changes to their portfolios,” said Bogdan Zvarich, an analyst at Finam Group.
Significant decision
“When making a decision, the Fed was guided by the achievement of the so-called full employment in the labor market,” says Ivan Kopeikin, an expert at the FG BCS.
Based on the results of the last meeting (May 2-3), experts pointed to the fact that significant decisions are made at extended meetings with a press conference. And so it happened - at extended meetings in March and June, a decision was made to raise the rate. In 2017, two more extended meetings will take place, on September 19-20 and December 12-13.
The US Federal Reserve began a policy of raising the rate on December 14, 2015, raising the rate by 0.25 percentage points. A year later, in December 2015, the Fed again raised the rate by 0.25 percentage points. The next increase by 0.25 p.p. was in March 2017.
Igor Dmitriev, head of the Central Bank's monetary policy department, said in an interview with Reuters on June 8 that the Fed's June rate hike has already been taken into account in the Central Bank's monetary policy. According to him, it is necessary to pay attention to the accompanying comments. The Fed's focus on inflation or the labor market will make it clear what the Fed plans to do to raise rates, he said.
Experts interviewed by RBC also advise paying attention to the Fed's comments. According to Zvarych, with the increase in the rate, funding in dollars becomes more expensive. As a result, the spread between the cost of funding and the yield of Russian assets is getting smaller. Hence the decrease in interest in Russian instruments, the expert explains.
“Raising the base rate is likely to reduce appetite, and, accordingly, have a negative impact on Russian assets and the ruble, but the effect will be insignificant, since the decision is already priced in,” said Ivan Kopeikin, an expert at BCS FG.
A change in the Fed's rhetoric and market expectations regarding the trajectory of the rate increase may affect the further steps of the Central Bank, says Yakov Yakovlev, senior analyst at Aton Investment Company for macroeconomics and debt markets. According to Zvarych, if the Fed takes a break in the rate hike cycle until December 2017, the Central Bank will be able to further reduce the rate at the next meetings.
“Naturally, the increase in the FRS rate will lead to some pressure on the Russian ruble (which, however, is moderately favorable for exporters and the federal budget), says Sergei Khestanov, macroeconomic adviser to the CEO of Otkritie Broker.
Market reaction
US indices reacted to the Fed's decision with a moderate decline. By 21:45 Moscow time, in relation to the opening level of today, the S & P 500 index fell by 0.25%, to 2434.1 points, NASDAQ - by 0.53%, to 6188.2 points, the Dow Jones industrial index - by 0, 06%, up to 21314.9 points. The DXY index (which shows the ratio of the US dollar to a basket of six major currencies - key US trading partners) fell by 0.07% to 96.9 points.
The decision had a moderately negative impact on the ruble exchange rate. On the MICEX, the ruble depreciated by 0.78% against the dollar to 57.42 rubles, and by 0.98% against the euro to 64.51 rubles.
The US stock market rose after the Fed's decision to raise the base rate. The day before it became known that the US Federal Reserve System (FRS) raised the interest rate to 1.25-1.5% from 1-1.25% per annum.
After that, the American market closed in positive territory. Thus, the Dow Jones Industrial Index rose by 0.03% to 24585.43 points, the S&P 500 broad market index decreased by 0.05% to 2662.85 points, the NASDAQ high-tech index increased by 0.2% to 6875 .80 points.
The decision to raise the rate was made by the American regulator against the backdrop of an improvement in the economic situation.
"Information since the Fed's November Open Market Committee meeting shows that the labor market continues to strengthen and economic activity is picking up at a steady pace this year,"
- it was indicated in the message of the financial regulator, distributed on Wednesday, following the meeting of its leadership.
At the same time, the Fed also points to a rapid decline in the unemployment rate than predicted. "Disaster-related destruction and recovery has affected economic activity, employment and inflation in recent months, but has not materially changed the course of the nation's economy as a whole," the Fed also said in a statement.
This Fed decision was quite predictable. Thus, only 4 out of 97 experts surveyed by Bloomberg expected the rate to remain at the same level, while all the rest predicted an increase in the rate to 1.25-1.5% per annum.
This is the third rate hike decision by the Fed since the beginning of 2017.
The regulator raised the rate in June to 1-1.25% and in March to 0.75-1% per annum. Previously, the pace of the Fed rate hike was slower: the rate was raised once in 2016 and 2015. In 2007-2008, due to the need to stimulate economic growth, the Fed gradually lowered the rate. In December 2008, the rate reached a minimum of 0-0.25%.
For 2018, experts predict that the rate will be raised to 2.25%. The economic situation in the US will allow the US regulator to take such a step. The Fed expects the country's economic growth rate to pick up in 2018 from the previously forecasted 2.1% to 2.5%, Fed Chairman Janet Yellen said on Wednesday.
“We expect US economic growth to pick up next year from 2.1% forecast in September to 2.5%. At the same time, the unemployment rate will drop to 3.9% from the current level of 4.1%,” she said. The US unemployment rate is the lowest in 16 years.
Considering that a meeting of the Board of Directors of the Central Bank will take place on December 15, at which the Russian regulator may lower the rate, the Fed's decision may lead to the exit of foreign investors from Russian assets, since such investments will give investors much lower returns and will be less interesting.
As Igor Nikolaev, Director of the Institute for Strategic Analysis of the Company, noted at a meeting of the FBK Economic Club the other day,
The “ruble stability” this year was achieved due to the inflow of funds as part of carry trade operations. According to market participants, the share of non-residents in the federal loan bond (OFZ) market exceeds 30%.
At the same time, the gradual increase in the FRS rate will add instability to the ruble.
In addition, in November of this year, the Ministry of Finance received a lot of additional oil and gas revenues. So much that by the end of December he will spend almost 204 billion rubles on the purchase of foreign currency. This is a record figure since February, when the financial department entered the foreign exchange market. The amount of such interventions is twice the amount of purchases in November, notes Alor Broker analyst Alexei Antonov.
The interventions of the Ministry of Finance in December will also play against the ruble. Analysts interviewed earlier by Gazeta.Ru noted that the actions of the financial department will be another factor that leads to the weakening of the Russian national currency. The only question is the timing and extent of the fall.
“In my opinion, the impact will be noticeable, but not overwhelming. At the end of the year, the activity of importers and banks will increase, which will have a stronger impact on the ruble. The actions of the Ministry of Finance will lead to an increase in trading volume by an average of 6%,” Georgy Vashchenko, head of operations on the Russian stock market at Freedom Finance Investment Company, commented earlier. By the end of this year, the expert expected the exchange rate to be around 60.50 rubles per dollar.
The dollar exchange rate on the Moscow stock exchange is now 58.61 rubles.
