Importance of this year’s meeting is arisen from negative processes in the world economy. These processes firstly include oil price decline and economic shocks in China. However, first of all, current situation of the US economy is discussed and taking into consideration the global attention to FRS’s steps, the US internal processes may have great impact on the world economy. The matter is about the decision to be passed by FRS in autumn on whether it will increase the interest rates or not. This issue should be discussed comprehensively.
Only information source about the meeting is the vice chair of the Federal Reserve System Stanley Fischer lecture. As expected, the lecture does not include anything about steps to be taken, except thesis. At the present time, several latest macroeconomic indices are positive. For example, there is sustainable positive trend in real estate market, sales increases. This was caused by increase of personal incomes and decline of borrowing. One of reasons of the first factor is positive situation in the employment market, reduction of jobless. Reason of the second factor is low interest rates in the financial sector basing on low interest rates of FRS. Demand increased in all consumption market except real estate market. All of these support country’s economy and show strengthening of economic recovering processes. For the present, only keeper factor is inflation.
After world economic crisis, US conducted soft monetary policy and this was caused by support of economy. Along with other macroeconomic performances, a target figure on inflation was adopted. The target figure was 2%. Inflation did not reach its forecast level. This factor is only obstacle for FRS to makje monetary policy severe, increase interest rate from the lowest level.
Fischer pays attention to inflation in his lecture, explains reasons, but does not say anything about the steps in the future. He only says the main reasons of inflation are cheaper energy carriers and high exchange rate of dollar. It’s interesting that Fischer said in his lecture that there are no reasons for continuation of oil price decline. It’s unclear how this opinion formed. In any case, both these factors tug the US inflation down and FRS current position is that macroeconomic statistics of August-September will define what steps will be taken in the future.
The directions are known. This is either increase of interest rates or keeping them at current level (0-0.25%). On one hand, US is interested in increase of interest rates. 1) this will an indicator of economic recovery; 2) treasury bonds will be reduced and it will be possible to buy them back cheaper. On the other hand, suspension of stimulating measures can prevent achieved results. And finally, negative external environment to be arisen from increase of interest rates may have negative impact on the US economy. That’s according to some experts, increase of interest rates may decline oil price more and this may restore deflation tendency in the US. Moreover, happenings in China should be taken into account while passing any decision. In June-August, China sold a part of US treasury bonds, which belonged to it. There is not accurate figure, but the matter is about $300 bln. Main reason of these sales is currency interference t prevent decline of yuan. To interfere the currency market, China sold bonds, got dollars and directed them to stabilization of its currency. It’s clear that China is the main holder of the US government bonds (total portfolio -$1.3 trillion). If China continues to sell, this will not be positive for the US and the US economy may face some macroeconomic, especially financial problems again. In this case, FRS can delay increase of interest rates for some times. Because, it’s not time to take any strict step. On the contrary, it’s revealed after happenings in China that Chinese economy and its successes, prices of financial instruments have been exaggerated. But in the US, main macroeconomic indicators show that its economy is stronger and more sustainable than forecasts.
What is more, there are some factors too. For instance, if the shocks continue in the developed market, and the US keeps stability and low interest rates, the large investors will be interested in the US again. This will be a support to a corporate sector and lead to that there is no need for support programs by the state.
All of these will show that the US economy preserved its status of most influencing economy the global processes. Chinese economic growth was temporary. Attention to Wyoming meeting proves it. For one, according to some Russian experts, if the FRS increases interest rates, the oil price will decline and Russian rouble will sharply fall. Latest sharp decisions in China, yuan devaluation, instability in financial market and other processes have not been assessed like it. Except other factors, this is arisen from world-scale role of dollar, because any step by FRS will have impact on dollar. 2-3 weeks earlier, analytics of most investment institutions forecasted that the FRS will increase interest rate in September and this will be based on positive macroeconmic performances. However, number of those who believed in this forecast is not too high, because it’s remains undecided if this step will unambiguously influence the US economy positively or not. We can understand from Fischer’s lecture that FRS’s decision will depend on latest statistics on inflation, but we can surely say that the abovementioned factors will be taken into account when the decision is passed. Though, Fischer did not say anything concretely in his lecture, he approves this supposition. According to him, the FRS is following happenings in Chinese economy and other developing economies. Besides, he stated that if the external factors influence the US economy, the US economy and economic policy has influenced other countries and therefore, uncertainty in policy is a negatively influencing factor.
“FRS’s goals are firstly defined for US economy, but I think that by supporting strong and stable macroeconomic environment in the country, we also serve global economy”, he stated. Such mood increases probabilities that US will not pass sharp and unbalanced decision. Especially, let’s take into account that now, the economic recovery is not at the level, which it’s needed to switch from support policy to sterilization policy. If nothing changes till FRS passes decision, most likely the interest rates will not be changed and world economy will avoid serious shocks.
Vahab Rzayev/ APA Analytical Centre
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