Economists are expected the Federal Reserve to change their language regarding monetary policy and let go of their previous pledge to keep interest rates low for a “considerable time.”
According to 68% of economists surveyed by Bloomberg News, the US central bank is likely to make use of the term “patient” when describing its intentions for monetary policy going forward. The Federal Open Market Committee, which meets starting today until tomorrow, is seen to hike up its interest rates in the middle of 2015.
Officials of the bank are currently discussing the timing of when to tighten its policies are expected to make use of favorable jobs data bringing them close to achieving the Fed’s goal despite falling prices of crude oil that are preventing inflation from picking up. In the US, 321,000 additional workers were hired in November, the highest number in nearly three years, while unemployment fell to 5.8% to hit its lowest in six years and approach the Federal Reserve’s target of between 5.2% and 5.5%.
59% of economists forecast that a drop in unemployment will be one of the factors emphasized when debates on rate increases begin, while 41% said that inflation lingering below the target level will be enough to delay the timing. The central bank has held its borrowing costs to near zero since December 2008 even after ending its final round of quantitative easing last October.
Committee members are expected to make an announcement and release updated economic data tomorrow afternoon which will be followed by a press conference led by Fed chair Janet Yellen.
The US economy is predicted by economists in a separate survey conducted by Bloomberg News to grow by 2.9% in 2015, the best rate in ten years.
Governor Haruhiko Kuroda from the Bank of Japan (BoJ) surprised markets after unexpectedly expanding its stimulus program which raised up stocks and depreciated the yen.
Five out of eight board members of the BoJ, including Kuroda, voted to increase the central bank’s yearly target monetary base from the original 60 trillion to 70 trillion yen to 80 trillion yen or $724 billion. According to the BoJ, it will buy additional exchange traded funds in order to increase its outstanding amounts by 3 trillion yen each year. Only three out of the 32 analysts polled by Bloomberg News had expected an expansion of monetary policy.
The decision of the BoJ comes after recent data projected that it may end up missing its target inflation rate of 2% within two years’ time and alongside a Japanese economy still reeling from the effects of a sales tax hike in April. While analysts had long been considering increased action from Kuroda during the past several months, the governor gave no indications about the decision in the days and weeks building up to the announcement.
Following the decision, the Nikkei 225 Stock Average shot up to its highest level since 2007, while the yen declined by 1.7% against the US dollar as of mid afternoon Tokyo time.
An upcoming decision for Prime Minister Shinzo Abe to further raise Japan’s sales tax to 10% in October next year is also believed to also have played a role in Kuroda’s plans since a suspension of the hike could negatively impact confidence on Japan’s fiscal sustainability.
Just hours before, figures showed that inflation in Japan fell to its lowest level in six months in September. The BoJ then revised down its forecast for its core consumer index for the fiscal year until March 2016 to be at 1.7% instead of the original 1.9%. It sees inflation to be at 2.1% in 2016, unchanged from the earlier outlook.
The bank said that it will be on the path of easing for as long as it takes to stabilize inflation at its desired level.
Latest Purchasing Managers Index (PMI) results show that the manufacturing industries of countries in Europe and Asia performed below expectations during the past month to dampen growth outlook in the region. The PMI is an economic indicator that is usually done through a survey that assesses and monitors the activity level of factories in areas such as new orders and output. Scores above 50 indicate that the industry is expanding while those that fall under 50 indicate a contraction.
In the UK, the Markit/Cips PMI fell to its lowest level in 14 months of 52.5 to indicate a slowdown in the sector’s expansion in August. It was previously at 54.8 in July after the figure was revised down from the original report. The decline’s largest contributor was in the amount of new orders which dropped by the largest amount since April 2013 to 52.9 from the 56.8 in the previous month. Factories’ rate of hiring decreased as well to the slowest pace in over a year.
Markit’s senior economist Rob Dobson says that the results suggest that the UK is not immune from the various turmoil and uncertainties being faced by its neighbors such as the eurozone, its primary trading partner, which has been struggling for the past year.
PMI in the eurozone also suffered from a decrease in new orders partly due to the ongoing unrest between Russia and Ukraine. Markit’s August PMI for the monetary region was the lowest in a year at 50.7 to fall from July’s 51.8. Two of the eurozone’s largest economies both recorded a decline with German factory activity at the lowest in 11 months at 51.4 while a deeper contraction was present in France where the measure was at 46.9.
According to Dobson, the poor results could add pressure to the European Central Bank to introduce additional monetary stimulus such as quantitative easing to revive the stagnating economy.
Meanwhile, the final reading of HSBC’s August PMI for China ended up below its initial flash estimate at 50.2. Factory activity levels previously reached the highest in 18 months in July when it climbed up to 51.7. While it reveals that the Chinese economy is under downward pressure, the effects may be more muted due to expectations that the Beijing government will enact additional policy easing in the coming months.