Thursday, January 27, 2011

US FOMC Statement

The US Federal Reserve left the Fed Fund Rate unchanged at between 0% and 0.25% as expected, and reiterated that interest rates are likely to stay at the low level for an extended period. On economic growth, the Fed acknowledged that economic recovery is continuing, although the pace has not been strong enough to bring significant improvement to the labour market. On inflation, the Fed said underlying inflation was still “somewhat low” while inflation expectations have remained stable despite rising commodity prices.

The Fed also decided to maintain QE2 of US$600 billion and stick to its initial plan to complete the programme by 2Q2011.

In our opinion, the FOMC statement gives greater assurance that (i) global liquidity will remain abundant, at least until mid-2011, and (ii) interest rate differential
continues to favour the emerging countries in view of the bias towards monetary tightening amid inflationary pressure.

The Fed mentioned that capacity utilisation rate in the US remained low. In this connection, we expect the US labour market may not improve rapidly while inflation may not be an imminent concern despite the positive boost from the US Tax Cut Bill endorsed in mid-Dec 2010. Due to its dual mandate of “Employment” and “Price Stability”, we expect the Fed to stay on course to complete QE2 and to maintain
the total quantum of QE (QE1+ QE2) of US$2.3trn at least until early 2012. The Fed Vice President Yellen had also earlier mentioned that the Fed may take up to seven years to completely unwind the QE programme. The prolonged QE duration ensures plenty of liquidity support for all asset classes.

Coupled with the pledge of liquidity support from the European authorities, we still expect incremental liquidity inflows into the emerging markets, catalysed by the interest rate and growth differential as well as prospects for regional currency appreciation.

Source: HLIB Research

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