Market focus now on Fed’s ‘dot plot’

As the US Federal Reserve pushed through with the anticipated interest rate hike on Wednesday (Thursday morning in Manila), monetary authorities expect tempered market volatility and uncertainty despite a more “hawkish” Fed stance seen moving forward.

“Because the market has fully expected the 25-basis point hike, market reactions so far (stronger US dollar, lower stocks and higher US treasury yields) are not unexpected. What will be spoken of more today is the Fed `dot plot,’ which shows a more ‘hawkish’ Fed than what the market first expected,” BSP Governor Amando M. Tetangco Jr. told reporters in a text message.

According to reports, the policy-setting Federal Open Market Committee unanimously voted to raise the key federal funds rate to 0.5-0.75 percent, only the second time that rates were increased in the last 10 years, following a similar move in December last year.

Reports said US Fed officials expected three more hikes next year to bring up the rate to 1.4 percent by the end of 2017, as US President-elect Donald Trump’s promise to jack up infrastructure spending and slash taxes were seen to grow inflation faster.

“Even then, the market would not likely dwell too much on that because the market knows that those dots do change over time,” Tetangco said.

“I am hopeful that recent dollar-peso movements have also factored these in and that any further movement during the balance of the year would only be small refinements to bank positions,” Tetangco added.

“Going forward, we’ll watch for indicators on how global markets judge the potential expansionary US fiscal policy, its impact on global demand, prices of global commodities and how these would affect our own domestic inflation and growth dynamics,” according to Tetangco.

For his part, National Treasurer Roberto B. Tan said the market “would have to digest the impact of this move, including the foreseen three other rate increases for 2017 and expectation of new fiscal and economic policies of the Trump presidency.”

“We remain confident that despite these external developments and market volatility, the country’s fundamentals and economic resilience will carry us forward. This administration will continue to pursue its economic agenda including aggressive investments in infrastructure and broad-based social services,” Tan said in a text message to reporters.

The government had programmed to issue sovereign bonds to generate at least $500 million in new money early next year to raise funds to be spent on vital infrastructure and raise spending as a share to the economy to at least 7 percent by 2022.

Socioeconomic Planning Secretary Ernesto M. Pernia, meanwhile, said economic managers might have to do some fine-tuning in interest rate assumptions when the Cabinet-level, interagency Development Budget Coordination Committee meets on Dec. 20.

“The BSP may consider raising policy rates to stave off inflation,” Pernia added. The Monetary Board, the BSP’s policymaking body, will tackle monetary policy on Dec. 22, although it was widely expected to hold off from raising interest rates this year.