Home' Trinidad and Tobago Guardian : March 23rd 2017 Contents BG14 | FINANCE
BUSINESS GUARDIAN guardian.co.tt MARCH 23 • 2017
'The economy is doing well'
The headline above was main
takeaway from the statements
by chairman of the US Federal
Reserve (Fed), Janet Yellen, at
a press conference following
last week's interest rate hike.
The US Fed raised interest rates by a quarter
per cent (25 basis points) thus giving a new
target range of 0.75 per cent to 1.0 per cent.
As the headline suggests, this rate hike has
come against the backdrop of an improving
US economy where the unemployment rate
has been steadily declining, inflation has
remained within expectation and economic
growth---even though it has been a bit low---
has maintained at a steady pace. Overall the
outlook is reasonably positive.
It has taken a long time to get to this point.
For reference, this is the third time the Fed
has raised rates in the nine years since the US
More importantly, though, this rate increase
has not come as a surprise to the markets and
has probably been the most significant event
of last week.
The US Feds signalled the rate hike, the
market accepted the signal. Going forward,
the Fed has indicated that their policy stance
has not changed and there are unlikely to be
aggressive in raising interest rate. This means
the path of rate increase remains priced into the
markets so there will be no major dislocations
from last week's move.
Appreciate that markets are forward looking.
They have anticipated what is likely to happen
and have priced that into their outlook and
therefore have invested accordingly.
At the start of the year the US Fed signalled
there would be three to four rate hikes for the
year; the market was anticipating two to three.
At this stage, following the first rate hike for the
year, both sides seem to be maintaining their
projections which leads to a stable market for
both stocks and bonds at this point in time.
Based on the current thinking of the mem-
bers that makes up the Fed's committee (the
FOMC), the median view---as represented by
nine of the 17 members---suggests that the
target range of rates at the end of 2017 will be
1.25 to 1.5 per cent.
Further increases are expected into 2018
which will take the rate to 2.0 to 2.25 per cent
and by 2019 rates are anticipated to be 3.0 per
Overall this represents on average two to
three rate hikes per year of 25 basis points
each. This gradual move is not expected to
roil markets and, further, it would mean that
the US economy will continue to grow at a
measured pace without any real or sustained
The US bond market, especially the long-
term bond---1o-year and 30-year---would
have already priced these moves in. Once the
suggested path remains in tact, long-term
bond yields should also remain stable and
It is extremely difficult to increase the rate
of US economic growth beyond the current
two per cent handle on a sustained basis as it
would mean the base case for inflation would
have to remain contained.
As a result, I would suggest more risk to the
downside where the US Fed may be forced to
move at a slightly slower pace. In which case
holders of longer dated bonds may see some
upside if the trajectory for rate increases is
The same scenario holds for the US dollar.
At this stage, the rate trajectory is priced
into the US dollar. So it is unlikely that there
will be strong upward moves in the US dollar
against other global currencies; at least not
on a sustained basis.
My view is that the US dollar is overvalued
against the major basket of currencies so there
is greater risk to the downside than there is
potential for further upside. This, of course,
does not factor in too much the political di-
mension which is still vague.
The budget and tax proposals of the Trump
administration that will eventually gain the
necessary support are still not clear and, of
course, these can cause a shift in the approach
articulated by the US Federal Reserve.
Regardless, the current path is also being
reflected in the US stock market. The market
continues to rise and the fundamentals are rea-
sonable even if valuations are on the high side.
There is, however, a red flag to watch. While
52 per cent of companies in the S&P 500 fi-
nancial services sector already increased their
earnings estimated for 2017.
In the broader market, 78 companies out of
110 that have issued earnings guidance have
issued negative guidance. This is something
to keep a closer eye on as this is where signs
that a recovery is running out of steam will
Also requiring close attention is the impact
that a series of Fed rate hikes will have on the
global markets, especially the emerging mar-
kets. This, of course, also speaks to the possible
impact on T&T. It is likely that the commen-
tary from central banks around the world is
going to shift, if not show outright changes.
We look forward to how the Central Bank of
T&T (CBTT) reacts to this move and positions
us for further US rate increases at their next
announcement on March 31.
By Thursday, the Bank of Japan indicated
their policy would remain unchanged while
China also responded by raising its interest
rates in order to support its currency.
Many oil-based economies such as Saudi
Arabia, the UAE, Kuwait and Bahrain raised
interest rates, with Turkey also included in
For Europe and the UK there are suggestions
that their accommodative policy stance may
be coming to an end. Of course with the Feds
also on a similar---and probably more aggressive
path relative to Europe---it means the pressure
on the Euro will not be as significant if they
had to tighten monetary policy.
However, it's in the emerging market space
that we should pay closest attention.
Many emerging markets, T&T included, need
to keep interest rates low in order to boost do-
mestic demand or conversely to prevent tight-
ening credit conditions from reducing demand
Comparatively low interest rates in the face
of rising US rates will have an impact on cur-
rency flows. This situation is exacerbated if the
recent rebound in commodity prices reverses
as it would mean less hard currency inflows
with the potential for increased currency out-
flows due to the narrowing of the interest rate
Emerging market central banks need to be
cautious and may require considerable assis-
tance from fiscal measures that can boost eco-
nomic growth. That is also likely to be the case
here in T&T but, of course, we are running out
of fiscal space as our debt burdens continue to
grow and we are drawing on reserves.
The current repo rate in T&T is 4.75 per cent
which represents close to a 375 - 400 basis
point differential between the US and T&T
central bank positions. This differential is
sufficient to maintain a stable currency po-
sition, so clearly there are other factors at play.
The challenge is that surplus TT dollar li-
quidity means that it is difficult for the Central
Bank to properly influence rates as the flow
through from the repo rate to the rest of the
economy is not sufficient.
Even so, at current interest rate levels, there
are enormous pressures on the TT/US ex-
change rate. It will likely get worse if the Feds
continues on their anticipated path and the
CBTT does not respond.
Appreciate that increased rates locally will,
at some point, translate to increased mortgage
rates. This will then have a direct impact on
disposable income. It is important that we get
ahead of this curve and one sure way--- dis-
cussed ad nauseam---is the mobilisation of
The fundamental issue here---as it has been
for the past decades---is that private capital
will only come to the party when there is a
clear understanding of the economic direction
along with properly articulated policies that
are consistent and transparent.
The politicising of the financial and eco-
nomic landscape may score political points but
it will not result in the desired mobilisation
We had a Vision 2020 document that called
for an average inflation rate of 5.0 per cent.
Soon after the ink dried on the paper, politi-
cians were seeking to justify an interest rate of
7.0 per cent that was trending higher.
We had a medium-term plan under the last
administration where few of the deliverables
were achieved. When you have those types
of inconsistencies private capital will remain
on the sidelines and even seek to find a home
Hopefully we now know what we have to do.
Let's now get on with the job so our economic
headline can be the same as the one above.
Ian Narine can be contacted at ian.narine@gmail.
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