As expected, FED has raised the USD base rate by 0.25% and changed cycle for raising interest rates in 2019 from 3 times to 2 times, which is considered as a "dovish" movement. However, the message from FED was not as "dovish" as market expectations,
As expected, FED has raised the USD base rate by 0.25% and changed cycle for raising interest rates in 2019 from 3 times to 2 times, which is considered as a "dovish" movement. However, the message from FED was not as "dovish" as market expectations, and overall, this has put both the stock market and the USD under pressure.
2 times for increasing interest rates in 2019
Interest rates management:
After the meeting, FED decided to raise the base rate by 0.25% (the fourth increase this year) and raise the USD base rate to 2.25-2.5% with 100% votes (10/10). This decision was made though there has been a sharp drop in US stock markets over the past few weeks (the S&P 500 has fallen about 10 percent since early December) and President Donald Trump has repeatedly demanded FED to keep interest rate unchanged. Speaking to the press, FED Chairman Jerome Powell said that Fed's decisions were not influenced by political pressures: "We have the tools to carry it out, we have the independence that we think is essential to be able to do our jobs in a nonpolitical way. We at the Fed are absolutely committed to that mission, and nothing will deter us from doing what we think is the right thing to do." However, the interest-rate Dot Plot chart shows that the FED is expected to raise rates two times in 2019 (three times previously) and a one-time increase in 2020. In addition, the long-term interest rate of the economy will reduce by 0.25%, from 3% to 2.75%.
In contrast to the previous meeting in September 2018, in this meeting, FOMC members generally had negative outlooks on the future of the US economy. Noticeably, the average GDP growth rate in 2019 is forecasted to reach only 2.3%, 0.2% lower than the forecast in September 2018. The reason is that the global economic growth has slowed down recently, and the volatility of financial markets can also have negative effects.
Not too "dovish" as forecast
FED's movement could be seen as a "dovish" one, as it has changed the cycle of increasing interest rates from 3 times to 2 times. However, FED's message is still "hawkish" than the market expectations: "Some further gradual increase in the target range for federal funds rates will be consistent with the sustained expansion of economic activity". Obviously, FED retains the phrase "gradual increases" instead of replacing it with "data dependent" as many market participants expected; futhermore, the word "some" has been retained too. Although the Fed remains cautious through "monitoring the evolution of global economic and financial markets and assessing their effects on the economic outlook," but overall, the FED's message is not too "dovish" and Mr. Powell is not too worried about the recent negative developments of the market.
Threats for both stock and USD
The US stock market fell sharply after the decision to raise interest rates from FED. After the trading session on 19th December, the S&P 500 and Dow Jones index fell 1.5% (despite the increase of 1.5% in the previous session). This has been the sharpest decline of the S&P 500 after an FOMC meeting since 2011. The reason, as mentioned above, is that the market expects a "dovish" scenario from FED. Asian indices such as the Shanghai Composite Index, Hang Seng, Nikkei 225 ... also fell 1-2% in the early morning session. However, the stock market in Vietnam was not affected too much when the VN-Index only slightly decreased by 0.06% at the end of the morning even it regained a green color occasionally in the session.
Despite not being as "dovish" as expected by the stock market, FED's decision in 2019 is generally regarded as "dovish" and this creates a downward trend on USD. USD Index was 0.1% lower than the previous session, and it is currently trading at 96.97. The USD/VND rate fell by 20 points from 23,315 at the end of 19th December to 23,290 at the end of December 20th morning session due to the optimistic view from the international market; and Vietnam's market is expected to receive quite a large USD supply in early 2019 (from FDI disbursements, selling capital ...). If the world market does not have any unexpected happenings, it is forecast that the USD/VND exchange rate will be stable from now until the end of 2018, even in January 2019 and the trading range is expected at 23,100-23,300.