World markets eye US Fed this week
March 13, 2016, 4:34 pm

A mixed bag of economic data coupled with poor Wall Street performance could delay further interest rate hikes [Xinhua]

Most market analysts believe that Yellen will be cautious preferring to carefully monitor both domestic and global markets for signs that inflation is rising, recession is done away with, and commodity trading has increased.

She may not announce a rate hike this week, but will likely signal further rate hikes in June.

While the US Federal Reserve did raise interest rates by 25 basis points (to 0.25-0.50 per cent) in December, the state of the world economy has deteriorated dramatically since then with 2016 being one of the worst starts of any new year in quite some time.

The current oil glut, where supply far outweighs demand and where storage capacity has reached near saturation has weighed heavily not only on the US federal reserve put on the European Central Bank (ECB) as well.

True, the US economy did offer some good news last week when the Department of Labor indicated that 242,000 new payroll jobs had been added in February – beating forecasts by about 27 per cent – but other sectors indicate that the US economy is growing moderately and is not as robust as some may think.

A report from the Labor Department late February showed that productivity in Q4 fell by 2.2 per cent compared to the same period last year.

For all of 2015, productivity rates grew by just 0.7 per cent, which the Labor Department said is the fifth consecutive year of weak growth.

The US dollar is also much stronger than last year, making US exports more expensive to international markets.

Factor in the slowdown in China and the oil glut and the Fed has reason to be concerned.

China’s economic growth is no longer forecast by exact figures in Beijing but by ranges. For 2016, the range is 6.5 to 7 per cent, a far cry from the double digits of ten years ago.

Oil prices are still low – US benchmark West Texas Intermediate is trading at $38.50 (two dollars above its level on December 1 when the Fed raised interest rates).

Fears that a meeting between major oil producers will be nixed is likely to push oil prices back down.

The US Federal Reserve must also take into consideration the announcement by the ECB “to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00 per cent”.

The ECB also lowered by 10 basis points from -0.30 to -0.40 per cent overnight deposit rates.

This would mean that banks that hold money overnight at the central bank would have to pay for the service; it would, therefore, be in their benefit to encourage lending.

If the Fed were to raise interest rates this week, while the ECB lowered them last week, it would create trade disparity and likely make US exports less appealing.

The euro gained then leveled out against the dollar to close at $1.1154 on Friday.

The BRICS Post with inputs from Agencies