Investors hold nerve
Fed tapering already factored in by market
Investors in the Thai financial market yesterday reacted calmly to the US Federal Reserve’s plan to start winding down its aggressive bond-buying stimulus in January as the market has mostly priced in the tapering.
The SET index eked out a small gain in early trade before pulling back marginally throughout the day. The main gauge edged down 0.24% to finish at 1,346.63 points in anaemic trade worth 25.82 billion baht.
Foreign investors continued their selloff with a net position of 1.1 billion baht, while the performance of Asian stocks was mixed. The baht weakened against the US dollar to 32.44/32.48 from 32.28/32.31 on Wednesday.
The impact of the Fed’s retreat on the economy could be minimal, unlike the past, due to Thailand being less dependent on offshore funding, Bank of Thailand senior director Parisun Chantanahom said.
The US central bank modestly trimmed the pace of its monthly asset purchases, by US$10 billion to $75 billion, and sought to temper the longawaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.
Mr Parisun said investors had already realised that fund inflows incurred from the Fed’s unconventional monetary easing would temporarily park in the local capital market but would reverse once the Fed trimmed the programme.
Even after the Fed begins scaling back its bond purchases, as much as $75 billion a month will still be injected into the financial system, he said.
‘‘The reduction by $10 billion a month is not a surprise because all investors have already prepared themselves and the cut will be gradually made, so its impact on capital mobility will not be significant,’’ Mr Parisun said.
‘‘The global financial market doesn’t panic. Economic fundamentals will dictate capital flows rather than quantitative easing. I estimate that offshore capital in our market will not leave the market immediately. [Foreign] investors will digest the situation first.’’
Caretaker Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong said the Fed’s announcement of its planned retreat of monetary easing comes as a boon to the global financial market as uncertainties are wiped out.
Thailand’s liquidity is high enough to cushion the impact from the Fed’s tapering, he said.
However, Anisuzzaman Chowdhury, director of the macroeconomic policy and development division of the United Nations Economic and Social Commission for Asia and the Pacific (Unescap), warned that Thai economic fundamentals are not strong enough to withstand the impact of the Fed’s tapering because of the country’s swelling household debt.
‘‘One of the things we have found is that household debt has a positive correlation with social inequality. When social inequality rises, the household debt also goes up and the country’s balance of payment experiences a deficit as a result,’’ he said.
Unescap estimates show that a cutback in the Fed’s money-pumping measures could slash gross domestic product (GDP) levels in Malaysia, the Philippines, the Russian Federation and Thailand by up to 1.3% in 2014.
Despite having measures on managing capital flows in place, Thailand should consider strengthening these measures and implement additional policies to mitigate next year’s global volatility, said Mr Chowdhury.
WASHINGTON: The Federal Reserve on Wednesday embarked on the risky task of winding down the era of easy money, saying the US economy was finally strong enough for it to start scaling down its massive bond-buying stimulus.
The central bank modestly trimmed the pace of its monthly asset purchases, by $10 billion to $75 billion, and sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.
At his last scheduled news conference as Fed chairman, Ben Bernanke said the purchases would likely be cut at a ‘‘measured’’ pace through much of next year if job gains continued as expected, with the programme fully shuttered by late-2014.
The move, which surprised some investors but did not cause the market shock many had feared, was a nod to better prospects for the economy and labour market. It marked a historic turning point for the largest monetary policy experiment ever.
‘‘The recovery clearly remains far from complete,’’ Bernanke said. ‘‘But we’re hopeful ... we’ll begin to see the whites of the eyes of the end of the recovery, and the beginning of the more normal period of economic growth.’’
Bernanke said he consulted closely on the decision with Fed vice chair Janet Yellen, who is set to succeed him once he steps down on January 31 after eight years at the helm.
‘‘She fully supports what we did today,’’ he said.
Investors took the action as a validation that the outlook for the economy was improving. After a brief pullback, US stocks rallied sharply, with both S&P 500 and Dow industrials closing at alltime highs.
The Fed said monthly purchases of both mortgage and Treasury bonds would be trimmed by $5 billion each, starting in January.
‘‘This is a modest change, not a big one, and it shows that they are not in a rush,’’ said Scott Clemons, chief investment strategist for Brown Brothers Harriman Wealth Management. ‘‘The Fed is using very careful language that they are going to continue to support the economy.’’
The Fed’s extraordinary moneyprinting has helped drive stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets earlier this year as investors forecast an end to the easing.
‘‘They finally pulled a Band-Aid off that they’ve been tugging at for a long time,’’ said Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.
The Fed launched its third and latest round of quantitative easing, or QE, 15 months ago to kick-start hiring and growth in an economy recovering only slowly from the recession. Its first program was launched during the 2008 financial crisis.
The central bank’s asset purchase programmes, a centrepiece of its crisisera policy, have left it holding roughly $4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.
To soothe investors’ nerves, the Fed said it ‘‘likely will be appropriate’’ to keep overnight rates near zero ‘‘well past the time’’ that the jobless rate falls below 6.5%, especially if inflation expectations remain below target.
The Fed has held rates near zero since late 2008.
It was a noteworthy tweak to an earlier pledge to keep benchmark credit costs steady at least until the jobless rate, which dropped to a five-year low of 7.0% in November, hits 6.5%.
‘‘The actions today are intended to keep the level of accommodation the same overall,’’ said Bernanke, who held out the prospect of fresh stimulus if the economy stumbled.
He said officials could further bolster their low-rate pledge, or even cut the interest rate they pay banks on excess reserves held at the Fed in a bid to spur lending.
In fresh quarterly forecasts, the central bank lowered its expectations for both inflation and unemployment over the next few years, acknowledging the jobless rate had fallen more quickly than expected. It now sees it reaching a range of 6.3 to 6.6% by the end of 2014, from a previous prediction of 6.4 to 6.8%.
Three policymakers expect the first rate rise to come in 2016, up from only two in September, while 12 of the Fed’s 17 top officials still see the move in 2015. Futures markets do not see betterthan-even odds of a rate hike until September 2015.