New US Federal Reserve Chairwoman Janet Yellen is expected to stick to the game plan when she chairs her first monetary policy meeting this week, further cutting back economic stimulus.
Yet, six weeks after inheriting former Fed chairman Ben Bernanke’s mantle, she is also under the gun to make a pivot in the way the Fed has been signaling its intentions.
Handled well, that delicate shift in how the Fed foreshadows an eventual rate hike could assuage markets.
Communicated badly, it could result in volatile movements and leave the new Fed boss on the back foot.
WEATHER IMPACT
The first meeting under Yellen’s lead of the US Federal Open Market Committee (FOMC), tomorrow and Wednesday, is expected to conclude that unusually harsh winter storms were mainly behind the slowdown in economic activity in December last year to last month.
The Fed has cut the program by US$20 billion to US$65 billion a month since the beginning of the year, and another US$10 billion cut could be decided this week.
Yellen already showed her bias toward the weather explanation when she testified before the US Senate on Feb. 27.
Taking note of the poor data, she said she “wouldn’t want to jump to conclusions.”
However, she added: “It is clear that unseasonably cold weather has played some role.”
A week later, the US Fed Beige Book survey of regional economies, important content for the FOMC policy meeting, mentioned the weather 119 times in explaining sluggish activity in much of the country.
REBOUND
A modest rebound in retail sales data last month suggested that there is some pent-up demand, and analysts hope this month and next month will show a rebound in the economy.
“We expect catch-up in March, leading to good momentum heading in to the second quarter,” Jim O’Sullivan at High Frequency Economics said.
Yellen, who has always stayed behind the scenes during her three years as Bernanke’s deputy, will face the media on Wednesday when she announces the FOMC’s policy decision.
With the bond-buying taper expected to remain on track, the challenge will be to explain how the committee will adjust the communication of its expectations: essentially, how it signals to the market when it plans to begin raising its key interest rate, held at a rock-bottom zero to 0.25 percent since December 2008.
At the end of 2012, the FOMC set specific thresholds for when it could begin lifting the rate: 2 percent for inflation and a 6.5 percent unemployment rate.
Most policymakers did not think those levels would be breached until next year, and the current Fed outlook for a rate hike is later next year.
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
The New Taiwan dollar and Taiwanese stocks surged on signs that trade tensions between the world’s top two economies might start easing and as US tech earnings boosted the outlook of the nation’s semiconductor exports. The NT dollar strengthened as much as 3.8 percent versus the US dollar to 30.815, the biggest intraday gain since January 2011, closing at NT$31.064. The benchmark TAIEX jumped 2.73 percent to outperform the region’s equity gauges. Outlook for global trade improved after China said it is assessing possible trade talks with the US, providing a boost for the nation’s currency and shares. As the NT dollar
The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments. The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said. The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades. The local currency surged as exporters rushed to
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