Stocks & Rupiah Indonesia: Cautious Reaction to Federal Reserve
Similar to yesterday, Indonesian stocks and the rupiah are still moving cautiously on Thursday (30/07). Supported by yesterday’s rising US stocks and today’s mostly rising stocks in the Asia-Pacific region, the benchmark Jakarta Composite Index climbed 0.22 percent in the first trading session on Thursday. However, the latest statements from the US Federal Reserve also signal that a US interest rate hike is coming closer, hence giving rise to a stronger US dollar at the expense of most global currencies and the gold price.
The Indonesian rupiah was down 0.08 percent to IDR 13,467 per US dollar by 13:20 pm based on the Bloomberg Dollar Index. Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.18 percent to IDR 13,468 per US dollar on Thursday (30/07).
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaAfter its latest two-day policy meeting, the Federal Reserve decided it needs to see more economic improvement before US interest rates (currently near zero) will be raised. While the US job market, housing and consumer spending have all showed an improvement, the US central bank wants to see higher inflation (toward the institution’s 2 percent y/y target) before implementing further monetary tightening. However, limited US inflation is partly caused by the current low petroleum prices, meaning that a rebound in energy prices will automatically push US inflation to the Federal Reserve’s target.
The Federal Reserve seems on track to raise its key interest rate before the year-end, perhaps even as early as September. Markets expect to see gradual monetary tightening in the USA as a sudden large interest rate hike could jeopardize economic stability, either in the USA, Europe, or emerging markets. By having kept its rates ultra-low since 2008, there are concerns that it may have caused dangerous bubbles in stock markets, bonds or other assets. A sudden large hike may cause these bubbles to burst.
Although the US unemployment rate touched a seven-year low, the Federal Reserve stated it wants to see “some further” improvement in hiring, implying that the US job market is nearing the Fed’s target. However, pay growth remains sluggish, while it also remains difficult to find full-time jobs in the world’s largest economy.
The next policy meeting (FOMC) is scheduled to be held on 16-17 September 2015.
Wall Street rose on Wednesday (29/07) after the Federal Reserve announced to keep interest rates unchanged. A modest rebound in Chinese stocks also provided some support to push US stocks higher. The Dow Jones Industrial Average rose 0.7 percent, Standard & Poor's 500 index climbed 0.7 percent, and the Nasdaq Composite rose 0.4 percent.
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