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Fed rate hike likely, but not immediate: Former finance minister
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Economic guard: Federal Reserve Board Chair Janet Yellen speaks during a news conference on the Federal Reserve's monetary policy, on Sept. 21 in Washington. Global markets are speculating whether the Fed will soon raise its benchmark rate in anticipation of the expansive fiscal policy US president-elect Donald Trump has planned. (AP/Alex Brandon)
W
hile markets speculate whether the US Federal Reserve will soon raise its benchmark rate after the US presidential election having concluded, a former Indonesian finance minister predicts that the powerful central bank will wait to implement such a policy until next year, providing emerging markets more time to brace the impacts.
Economist Chatib Basri, who served as finance minister from 2013 to 2014 under president Susilo Bambang Yudhoyono's administration, said the Fed would likely reconsider raising interest rates next month, as the US dollar had been strengthening against all currencies after Republican presidential candidate Donald Trump won the election earlier this month.
Should the Fed raise its benchmark rate in the current situation, it would further strengthen the US dollar but at the cost of seeing lower revenue from exports, Chatib said.
He predicted that the Fed would instead increase the benchmark rate in the second half of 2017 in anticipation of Trump's expansive fiscal policy, such as a planned increase in infrastructure spending.
"With expansive fiscal policy, US budget deficit will get higher, they need to issue more bonds, which [may cause] the interest rate to hike," he said during UOB Indonesia Economic Outlook 2017 in Jakarta on Wednesday.
The Fed’s rate hike would potentially lead to a capital outflow from emerging economies, like Indonesia, as investors will likely move their money in search of better yields.
Last week, Bank Indonesia (BI) governor Agus Martowardojo said global markets had previously predicted the Fed would postpone its plan to raise its policy rate one time in December this year, but Trump’s victory and his previous statements on the US economy had reversed the prediction.
“The prediction on the Fed’s plan to raise its rate one time in December was included in our calculation when we cut our seven-day reverse repo rate by 25 basis points in October. The Fed is also predicted to increase its rate twice next year and thrice in 2018,” he said.
