Anyway, the Federal Reserve chairwoman hinted that they will conduct careful policy. Now, according to her, current monetary policy is appropriate for achieving the goals intended for inflation and labour market. Remind that the Federal Reserve chairwoman has always stated that the main goal is to reach level of inflation 2%. Note that the economic activity, as well as household expenses, investment, house market, export and other spheres in the country increased with slow rates. At the same time, it is also stated that the situation in the labour market recovered and new jobs have been launched.
A factor, which is one the main indicators and directly affects the Federal Reserve’s decisions, is the level of inflation. Though a small growth is observed, the inflation is below 2%. One of the factors affecting this is decline of energy carriers. As for labour market, an ambiguous situation emerged in here. On one hand, 230,000 jobs are launched every month which increase employment and consumption spending. On the other hand, negative tendencies in the global economy, reduction of its growth rate, strengthening of dollar negatively influenced the local production. Moreover, low oil price caused mass layoffs in energy sector. Therefore, taking into all factors, not only launch of new jobs, the situation in the labour market is not assessed as successful, while the statistics gives ground to this. So, the jobless level in the US is stabilizing and makes 4.9%, which is down from the period of crisis in 2007-2008.
To note that J. Yellen also spoke about the external factors affecting the Federal Reserve’s decision. These factors are headed by decline of growth rate in Chinese economy. Tendencies of decline in the Chinese economy will continue next years because of switching to consumption model from investment model of economic growth and to local production from export. This requires a certain time. Consequently, the situation has created uncertainty in the world financial market which caused the Federal Reserve to delay the toughening of monetary policy. Moreover, the external factors also include low oil price. At first sight, this factor is appropriate for the US economy. Because the US is one of main oil importers and cheap energy carriers will support increase of economic activity and consumption spending. However, on the other hand, in all countries, which depend on oil, the financial and economic situation is worsening. This causes negative processes in the global economy and this is also inappropriate for the US indirectly. Because these countries include the partners of the US and consequently demand for the US goods decreases. And this has negative impact on the export.
Plans of not raising of the interest rates by the Federal Reserve are also related to another point. So, according to observations of recent months, the assumptions on impact of low oil price and cheapening of the export on the devaluation are not justifying themselves and the inflation tends to increase naturally. All of these facts cause the Federal Reserve not to raise the interest rates. This is ground for dollar not to go up.
To acknowledge that all of us are interested in the Federal Reserve’s decisions whether or not they affect the dollar. Note that raise of the interest rate strengthens the dollar in the US, reduction weakens. More accurately, toughening of monetary policy by the Federal Reserve strengthens the dollar. As a result of toughening of monetary policy, the money costs the US financial system dearly and therefore, the dollar rises. This is a simple cause-and-effect chain. Everything is more complicated in reality, but the meaning remains unchanged – raise of interests rates strengthens the dollar.
Strengthening of the dollar means that the exchange rate of dollar against other currencies rises. In the current situation, the dollar must not rise. This is already happening. After statements of the Federal Reserve chairwoman, the dollar has immediately lost a half percent against Euro. Generally, Euro rose 0.9% on March 29 and made $1.1291. this is close to two-week high ($1.132 on March 17). Same rates were observed on October 2015 and February 11, 2016. If the Euro exceeds $1.132, it will reach half-year high. Taking into account the Federal Reserve’s decisions and plans, we can forecast it.
It’s important to go in cyclic technical analysis. According to EUR-USD rate in the recent years, the EUR was at high level by the mid 2014 – 1EUR = 1.38 USD. However, the EUR declined. It was known in October 2014 that the asset redemption program will be completed next half-year. Application of that program was gradually reducing by that time and completed in October 2014. This was anti-crisis measure and considered redemption of securities by the Federal Reserve and was the main component of soft monetary policy with the zero interest rate. That’s the Federal Reserve ended issuance of additional dollars to the market by completing the program and started to toughen the policy. Since that time, the dollar has been rising. Refusal of toughening plans will have reducing impact on the dollar.
Stable rate of dollar in the world market will have strengthening impact on all currencies, including manat. Central Bank of Azerbaijan said that exchange rate of manat against dollar depends on not external factors, but merely balance of demand and supply inside the country and balance of payment. Theoretically, this can be true, but in reality, if the dollar falls in the world market, it occurs in Azerbaijan (Kazakhstan, Russia and other countries) too. In general, we can say that not raising of the interest rates by the Federal Reserve may cause two important effects: Falling of dollar and oil price rise. Because, the oil was nominated at dollar and falling of dollar will cause oil price to rise.
Vahab Rzayev, APA Analytical Centre
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