Economists assess Fed’s Yellen as dovish

DAILY SABAH WITH AA
ISTANBUL
Published 18.06.2015 17:57

The U.S. Federal Reserve (Fed) on Wednesday kept interest rates steady once again at zero to 0.25 percent and gave only faint hints about when the first increase in nine years might occur. While the Fed's decisions were in line with market expectations, lower economic estimates from Fed officials and explanations of Fed Chair Janet Yellen were evaluated as "dovish" by economists. Yellen had said in February that the word "patient" meant the Fed's Open Market Committee (FOMC) would probably wait for at least two meetings before raising rates. When "patient" was removed from the statement after March's meeting, the markets expected interest rates to start to hike after the meeting in June. However, a possible negative impact of the fast rising dollar on the economy along with a joint report by the International Monetary Fund (IMF) and the World Bank that evaluated the global economy and concluded raising interest rates in 2016 would be more appropriate, deferred hike expectations. While the Fed did not increase interest rates on Wednesday in line with economists' expectations, the dollar index and market interest rates fell after Yellen's market-friendly explanations. Speaking at a press conference after the announcement, Yellen said the weak labor market in the U.S., as well as the slow progress in the inflation outlook, were the two principal reasons for the June rates decision.

Bora Tamer Yılmaz, an economist at Istanbul-based Ziraat Investment, evaluated the Fed's last meeting and said the entire text of the Fed's decision was the same as the text in April except for the first paragraph. "Employment and inflation have to accelerate in the U.S while the problem of Greece has to be solved in the eurozone," Yılmaz said. Emphasizing that the Fed is supportive if not dovish in an environment in which uncertainties are observed, Yılmaz said the Fed should be focused on a rate hike cycle by trying to decrease the importance of the timing of the first rate hike. Yılmaz underscored that no hawkish statements were given in yesterday's decision text or mentioned at the press conference, and said: "Although the median expectation showing year-end Fed policy interest rates remained the same, seven members expected only one hike within this year. That's why the dollar index fell below the 95 level [to 94.1]. The demands for U.S. government bonds also grew and the yield fell below 2.3 percent [to 2.27 percent]." Yılmaz added that while the Fed did not pose a risk to developing countries, its inner dynamics might seal the destiny of those countries. "Thus, the theme of the polarization among developing countries, which has been prevailing since the tapering talk of former Fed Chairman Ben Bernanke in 2013, persists. Those who focus on long-term structural reforms can be successful. While India has been leading in this field, Brazil has fallen behind so far," Yılmaz emphasized.

Özlem Bayraktar Gökşen, research director at Phillip Capital Turkey, said the Fed's text, which mentioned the Fed's evaluation of economic activity, employment and inflation in the first paragraph, was more constructive and positive compared to the meeting held in April. Gökşen emphasized the intonation was weak in the first paragraph of April's text because of the harsh winter impacts, bad weather conditions, strikes at some ports and value increase in dollar. She added that it was stated in the text that this weak intonation was expected to be temporary. "Therefore, June's text was seen as stronger after these temporary factors gradually disappeared," Gökşen said, adding: "New things weren't said in June's text in general. The continuation of the downward revision of interest expectations created a perception that the FOCM drew a more dovish picture in June. Within this framework, the dollar index decreased from 95 to 94.1 levels, and this value loss had a positive impact on the currencies of developing countries."

Analysts at Goldman Sachs predicted the Fed was closer to making a rate hike than ever before. "It is clear that one will come before the end of the year, and September is a possible date. [However,] later at the end of the year is more likely," Goldman Sachs said in a note on Wednesday.

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