Prolonged Uncertainty as a September Fed Fund Rate Hike is Unlikely
Contrary to the expectation of most analysts, the US Federal Reserve will possibly refrain from raising its key interest rate in September. On Wednesday evening (19/08) the minutes of the Fed's latest FOMC meeting (held in July) were released and they showed that most officials agreed that the US economy is heading for an interest rate hike but is not quite there yet as inflation remains lower than targeted while the current sluggish global economy poses risks and triggers high volatility.
Although some may think it is positive for emerging market assets that the looming US interest rate hike is delayed again (as a hike is expected to lead to capital outflows from these emerging markets), prolonged uncertainty about the timing of higher US interest rates will also negatively affect emerging market assets (despite the US dollar weakening after the release).
The latest FOMC minutes show that the Federal Reserve is cautious about raising interest rates. The institution mentioned that it wants to be “reasonably confident” in the inflation outlook before deciding to raise rates. However, it also indicated that the timing of the hike is coming closer and closer without making a reference to a possible September rate hike.
Indonesia's benchmark stock index (Jakarta Composite Index) immediately fell after opening as investors are concerned about the current situation (looming higher US interest rates, recent devaluation of the yuan dragging down the rupiah, low commodity prices, Indonesia's weak GDP growth as well as weak import and export performance). However, the performance of the Jakarta Composite Index improved as the first session ended. From a low of -1.20 percent around 10:00 am local Jakarta time, it improved to -0.77 percent (thus still being in the red zone). Meanwhile, the Indonesian rupiah had depreciated 0.07 percent to IDR 13,852 per US dollar according to the Bloomberg Dollar Index by 13:00 pm local Jakarta time.