US Fed decides to taper by US$10 bln per month; stocks rally; economists see green light for OCR hikes in NZ

US Fed decides to taper by US$10 bln per month; stocks rally; economists see green light for OCR hikes in NZ

By David Hargreaves and David Chaston

Westpac economists say the move by the The US Federal Reserve to start "tapering" its supportive monetary policy gives the green light for our Reserve Bank to start hiking interest rates early next year.

Early today the Fed said that it would reduce its Quantative Easing programme by winding down its bond purchases by US$10 billion a month to US$75 billion a month, but has signalled that interest rates will stay low for a long while.

The US sharemarket soared on the news, based on relief that the reduction in bond purchases was less than it might have been, along with the comments from the Fed about monetary policy remaining accommodative.

Westpac economists here said they regarded the Fed's decision to taper as "important encouragement for the RBNZ to hike the OCR" next year.

"This supports our call for a March OCR hike. However, we doubt that this news would push the RBNZ into hiking the OCR in January, particularly if the NZD/USD remains high."

The Fed had led global markets to believe that tapering would commence in September and in the build up to that global interest rates rose. When the taper didn't happen this caused disruption.

Our RBNZ has expressed its frustration that the taper didn't occur in September - as markets had been led to believe - because our central bank is potentially constrained in hiking our interest rates by the high value of the Kiwi dollar. Obviously rate hikes here - without the accompanying removal of supportive monetary policies in the US - run the risk of driving the dollar ever higher.

The move by the Fed to now begin the tapering process, albeit very gradually, does now clear the way for our central bank to commence what is expected to be a fairly aggressive hiking of interest rates next year in response to a fast growing economy and emergence of inflationary pressures.

The Westpac economists said the accompanying statement from the Fed today seemed aimed at ameliorating the market reaction. The Fed explained that the pace of future tapering was not pre-determined, and would depend on evolving conditions in the labour market and inflation.

The said the key sentence was: "If incoming information broadly supports the Committee's expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings." 

The Fed added a new sentence into its guidance on interest rates, suggesting it intends to hold the Fed Funds Rate at near-zero rates for longer than previously signalled: "The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal." 

The Westpac economists said markets reacted initially to the taper, by sending 10-year US Treasuries higher and the NZD/USD lower.

"However, the market reaction quickly reversed in response to the dovish signal on interest rates. At the time of writing, NZD/USD had retraced to 0.2 cents above its pre-taper level, and US 10-year Treasuries were only 2bp lower."

The Detail of the Fed announcement is:

It will now only purchase US$75 bln per month, down from US$85 bln per month.

Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. 

The key benchmark of a 6.5% unemployment rate remains.

The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In the data released with the decision, it sees the 2014 unemployment rate in the range 6.3 - 6.6%.

The exchange rate has seen the NZ dollar rise to US$0.825 from US$0.822.

And here's comment from Harbour Asset Management

The US Federal Reserve (Fed) has announced that it will taper its Quantitative Easing (QE) purchases from $85bn to $75bn a month. At the same time it has strengthened its guidance on overnight interest rates. Markets have breathed a sigh of relief.

Surveys ahead of today’s decision put the chances of a QE taper at 30-50%, with most seeing it as a close call. Much of the uncertainty surrounded the tactics of the decision: the role of chair soon moving from Bernanke to Yellen; thin December market conditions; and markets still nervous from the impact of the May-June taper talk.

In the end the Fed has rightly focused on the economic fundamentals and announced that: “in light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases”.

The Fed has not set a fix course for further tapering, which will be taken in measured steps based on the economic data. The statement went to great lengths to emphasise that monetary conditions are still stimulatory (i.e. it is the stock of QE purchases not the flow that matters): “The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates”.

Importantly, the Fed has strengthened its forward guidance on overnight interest rates saying that: “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the 2 percent longer-run goal”.

With the offsetting effects from QE tapering and stronger forward guidance, foreign exchange and interest rates markets were little changed after the announcement. As such, in our opinion there are few implications for the RBNZ. They still look likely to be the first central bank to start tightening in 2014, and having to deal with the implications of an elevated NZ dollar.

After becoming nervous about the chances of QE tapering in recent weeks, equity and commodity markets have breathed a sigh of relief on today’s news, with the S&P 500 up over 1.5% on the day. More generally, with this policy decision out of the way, markets can refocus on economic news and fundamentals.

There was also news overnight of stronger than expected German business confidence and lower than expected UK unemployment. Both serve as reminders that we are entering 2014 with an encouraging global macroeconomic backdrop. This morning’s NZ GDP release of 3.5% annual growth highlights the domestic economic momentum.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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13 Comments

What is it aout NZ economists that see it as a Good Thing to keep most of NZ in constant state of poverty?   What is so wrong with making a legitimate profit, that it must be fleeced away and given to the bank via interest payments?

However is NZ suppposed to grow internal value, if we aren't allowed to internalise profitable business results??

So cowboy, with only 30% of NZers having mortgages, you're obviously referring to the poor retirees and other people trying desperately to live off fixed interest income (i.e. where that interest payment goes onto from the banks), many of whom are now living at the poverty levels based upon the LGs $18 an hour living wage, who have saved all their lives (paying 66c in the dollar tax during some of their life time to provide "free" university education to their children, and now assist in funding their grand children's house deposits who's own funds got used up doing their OE that their parents/grand parent never got to do), who have  that their income devasted in the past 5yrs in a process designed to bail out borrowers - good to see the symphathy as many out there only have symphathy for over-leveraged borrowers... ok small rant, but so pleased to see someone for whom the light has gone on

Are you seriously trying to claim 70% of NZer's own their own home freehold.

as for the $18/hour living wage (pushing up minimum wage increases shelf prices)...
or saving all their lives (and having cheap fuel and labour opportunities and cheap healthcare while doing so)
and whose university education is much cheaper then, when it was subsidised by taxpayers (more of that 66c...)
And those of us who don't get an OE, as we're still paying rent (ie our landlords mortgage) and trying to pay for/off our education.
And as for the "bailing out borrowers" ...in an year where our NZ (australian owned) banks made the best profits in the world...?

If no-one paid rent or mortgages...where do you think that would leave the living wage target?

well said cowboy, this place has run amok by lobbyists and vested interests

That same generation that bred like rabbits, used up most of if not all of the world's cheap resources and now expects the next generation(s) to carry on finishing off the planet so they have a cosy retirement?
Or that same generation that through greed have pushed up house prices, forcing younger ppl to pay through the nose?
Or take Japan, no interest rates for how many decades?
Me thinks you have blinkers.
regards
 

 "0% compared to ours already at 6%"
Talk about exaggeration.  Ours is at 2.5% not 6%.
You can't get a mortgage in the states for 0%.

A quality proposal will get you high two's for 15 years, (carded around 3.75%) then they come here and buy up..easy!
The comp. advantage is the real point.- Term & pricing

Bank economist continue to try to talk it up.

speckles - you could make a fortunate by going to iPredict if youre thinking that theyre talking through a hole in their heads...look forward to seeing your bids on there, I'm short of them to hit

no I'm making better money in the real world, easy with the ability to loan on the US market.

You can bet against the banks?  hmm i might have a go.

Lower interest rates for longer in the US.
Tapering uncertain still.
Plenty of global risk of negative events.
Europe bogged down.
RBNZ & Banks talking up the interest rate hikes. Why are they so excited at the prospect?
A (relatively) high interest rate setting is not going to help NZ-ers.
Inflation is still firmly inside the 1-3% band in NZ.
Lower for longer...  
iPredict is just a small minnow in the face of international markets (or so I was told).
RBA looking at more cuts.
 
 
 
 

All of those first several points are dead right in my opinion as well MB, not so sure about the conclusion but who know nothing's certain..but I'd say it's wrong so let's be clear for the record what your think...are you still expecting two rate CUTS as you've been stating for some time now, or now just one rate CUT....let's say you have changed to just lower for longer, let's be clear, you're saying ZERO moves (other than a CUT) in the first half of 2014.... Right?  
IPredict, yes interesting. With the economic/markets type bets, I'm aware of a few making easy money as an amusement/hobby because it is the minnows playing against some of the professionals, but the actual markets themselves are seriously hard to make money in, and therefore if you're going to have any notice of a forecast, you're best to look at market pricing. IPredict has value/interest in some of the non-Econ bets such as politics, but then again I dare say the ones with inside knowledge there are cleaning up that as well.