Friday, February 22, 2013

Specialmentary -Federal Reserve(US) - Rumor on stimulus pace slowing

Possibility for Federal Reserve to slow stimulus pace

Undoubtedly, one of the reasons causing recent weeks of equity market correction should be worries that the Federal Reserve may slow stimulus pace in coming months. It is true that economic activities in Europe, the US and Asia had sign of improvement since September, 2012 after monetary policies such as low interest rates and QEs (i.e. by Bank of Japan, Bank of England and Federal Reserve).

It is also true that the central banks may slow the monetary stimulus paces to relieve potential risks such as inflation rebound. From basic economics and monetary policy theories, increase in money supply (due to QEs and low interest rates) is likely to cause higher inflation in the mid-to-long term.

Interest rate rebound unlikely in 2013

However, it is unlikely for the Federal Reserve to raise interest rate in the year of 2013 (from a close-to-zero Federal fund rate level). The Federal Reserve has indicated in recent months that the central banks are likely to maintain low interest environment. Besides, economic activities during 4Q12 for Europe and the US were steady but not particularly good.

For example, the 4Q12 GDP in the US indeed contracted 0.10% QOQ while Eurozone suffered from a QOQ contraction of 0.60%. In other words, the central banks in the developed countries are likely to maintain loose monetary policies in the year of 2013. Nevertheless, the equity markets could be somewhat volatile in 2Q13 given reasons such as 1) profit taking from investors and 2) change of market sentiment due to concerns on possible stimulus pace slowing.

Table 2: 4Q12 GDP for major developed countries

Interest rate #
QOQ change
YOY change

# risk-free rate from central banks

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