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Markets wait for Jerome Powell to set the tone
JEROME Powell's first major policy act as US Federal Reserve chairman will be closely watched, but it is what he says that will speak louder than what he does.
Analysts say markets have already priced in a 25 basis points hike to 1.75 per cent in the Fed Funds rate during the two-day US Federal Open Market Committee (FOMC) meeting on March 20, with the CME Federal Reserve watch tool indicating a 94.4 percent probability of that happening.
But while the general consensus is that the Fed will raise rates, it is what it will say - its assessment of the world's largest economy, including inflation and forward guidance or dot plots (three or four-hike plan?) that will draw the greatest market scrutiny.
The FOMC meeting is the highlight of a super busy week for monetary policy makers, be it in Buenos Aires where G20 finance ministers and central bankers are gathered or the policy meetings in UK, New Zealand, Taiwan and Indonesia. It will be Mr Powell's first FOMC meeting and press conference since he took over from Janet Yellen as Fed chief in February and pledged greater transparency.
"A new boss' management style and approach can fundamentally change a job. This is why this week's FOMC meeting is arguably one of the most important policy setting meetings in recent years... (it) will debut his style, both in chairing the rate setting committee on how to come to a decision, and in his communication to the market," said JP Morgan Asset Management's chief market strategist for Asia Pacific Tai Hui.
"Could the fresh-faced Fed force four hikes?", asked Ian Samson, markets research analyst at Fidelity International. Therein lies the market's chief fixation that explains its volatile behaviour since February: Will the Fed stay with the market's default expectations for three rate hikes this year or adopt a more hawkish tone and push up the "dot plots" to four?
Recent price-related data out of the world's largest economy including CPI (consumer price index) and PPI (producer price index) showed little signs of price pressures picking up aggressively, which may suggest that the Fed's gradual pace of normalisation of interest rates could stay the course.
Yet, hawkish expectations have been fuelled by "Fed speak" over the past month, exuding stronger confidence amid a more buoyant US economy.
"The Fed sounds self-assured now, but that's easy to do after a long period of plain sailing. The data still shows no acceleration in inflation. As such, if and when economic and market conditions get tougher, at least one of those four rises looks vulnerable," said Mr Samson, commenting on the event of a four-hike plan.
Even so, the debate around four versus three hikes, he said, doesn't quite matter. "In terms of US and global economic growth, two hikes in 2018 aren't that much different from three or four hikes. In that sense, Fed hikes were never our worry for growth and risk assets this year. We were more concerned about a sudden rise in the oil price, or a harder landing in China," he noted.
He added: "We might be looking in the wrong place for tighter monetary conditions - the Fed's balance sheet reduction, or quantitative tightening, combined with higher US Treasury issuance, has greater potential to put upward pressure on longer-dated bond yields. This could be what really spooks markets and there wouldn't be much the Fed can do about it. Except, of course, not hike four times."
There are other uncertainties that may weighed on the decision - the full impact of US President Donald Trump's tax cut, the threat of rising protectionism that could harm US and global growth, plus the political turmoil in the US. However, Mr Tai Hui said the Fed may choose to set aside these unknowns and focus on hard economic data and trends.
In the lead-up to the meeting, Asian markets could find themselves in a range-bound or "holding pattern". Singapore's Straits Times Index lost 14 points or 0.4 per cent to 3,498.29 on Monday. Elsewhere, key indices in Japan and South Korea closed lower while markets in China, Hong Kong, Australia and Malaysia closed marginally higher.
"Investors are right to sit on the sidelines," said Crossbridge Capital's Singapore-based partner Charlie O'Flaherty, who does not see a fourth rate hike at this stage in the absence of convincing evidence of rising inflation.
US interest-rate hikes may hold a silver lining too.
"It's important because the Fed's willingness to raise rates is a reflection of its confidence in the US economy. This should be positive for global risk assets, including equities, corporate credit and emerging market debt," said JP Morgan's Mr Tai Hui.
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