Ripples from the Fed policy rate increase

[rooster59]

Ripples from the Fed policy rate increase

ARAYAH PREECHAMETTA
SPECIAL TO THE NATION



Prof Arayah Preechametta

BANGKOK: THE US Federal Reserve finally raised its policy rate on Wednesday. The decision will affect not only the United States but many other countries. Higher interest rates, together with declining world oil prices, will have two profound impacts.

First, more outflow of capital from some countries to the US will be induced, and worsen those countries' fiscal deficit and/or current account deficit.

A fiscal deficit occurs when a government has higher treasury expenditures than revenues. The current account deficit is the deficit in trade and service accounts. For oil exporting countries, lower world oil prices will worsen their current account deficit, while oil importing countries like Thailand will benefit from a narrowing current account deficit.

Second, both the public and private sectors' debt burden denominated in US dollars may increase. If that happens, the debt burden would rise because of the appreciation of the US dollar. In addition, declining world oil prices could make oil companies more vulnerable to default risks, since these companies have borrowed heavily to finance their drilling activities due to low-interest rates. Hence, the net total outcome may eventually push up those net borrowing countries' default risks.

Stock markets have been volatile due to the rapid decline in oil prices and the rise of the Fed funds rate. The SET Index fell from 1300 points to 1280.92 points on December 11. Investors sold energy stocks which had gained a lot of weight. The share price of PTT dropped to Bt220 per share, which is the lowest in five years.

Falling oil prices gives the government more time to launch the 21st round of offshore gas exploration concessions.

Overseas companies may face higher financing costs to operate under these new concessions. This is likely to be the main reason giving the government more time to negotiate with opponents of the concessions.

Although world oil prices will go up when those high-cost producers are temporarily out of business and global economic growth becomes stronger, it is still likely that this situation of low oil prices will persist throughout next year.

In a recent report of the International Energy Organisation, it predicted that next year the oil supply glut will become more severe. It is also expected that average global oil consumption growth will be about 1.23 million barrels per day. The sluggish global economy could slow oil demand growth further.

If oil prices remain quite low over this period of having a strong US dollar, prices of big-cap energy stocks in Thailand could move downward further. On the other hand, the price of stocks that are related to construction, real estate and the promoted "10 future industries" should increase.

Overall returns from the domestic stock markets could be lower than previous years due to sluggish global growth. Hence, investing more in some overseas stocks can be another bet given that investors are well protected from volatile foreign exchange risks.

Prof Arayah Preechametta is a lecturer at the Faculty of Economics, Thammasat University.

Source: http://www.nationmultimedia.com/business/Ripples-from-the-Fed-policy-rate-increase-30275255.html

-- The Nation 2015-12-19

[trogers]

Higher Fed rate would induce higher household savings, or at least, less household debts, due to increase in the cost of borrowing. Isn't this is a positive factor?

Lower oil prices would cause some deflation in consumer prices, or at least tame inflation, which is another positive factor.

These two factors are negative only to those who borrow to speculate.

[ezzra]

Oil prices have been tumbling for a while now to a new lows, still, airline ticket price remain almost

the same and no one raises the question why, now that the barrel of crude is at $35 and going down,

will airfare get cheaper? I don't think so...

Edited December 18, 2015 by ezzra

[jpinx]

OPEC screwed up their chance to peg oil prices, so the recent drop has nothing to do with the US rates. They want the oil price to go up, not down, since they are desperate to get a better return on fracking, and take advantage of the recent change in law allowing oil to be exported. Meantime, Iran is getting sanctions lifted and will be allowed to export oil again, and they are talking about a lot -- so it's push-me, pull-you and maybe the overall effect will be not much change.

[Srikcir]

OPEC screwed up their chance to peg oil prices, so the recent drop has nothing to do with the US rates. They want the oil price to go up, not down, since they are desperate to get a better return on fracking, and take advantage of the recent change in law allowing oil to be exported. Meantime, Iran is getting sanctions lifted and will be allowed to export oil again, and they are talking about a lot -- so it's push-me, pull-you and maybe the overall effect will be not much change.

OPEC does face a dilemna.

With falling oil prices it has decided to make up for lost revenues by increasing oil production. At the same time Iran is gearing up to full production once again for neede capital. And with a change in government oil-producing Venezuela may again let foreign oil companies back to the country to increase production that faltered under the nationalization by the previous socialist government. Increased worldwide oversupply of oil will then further push the price of oil down, triggering more world production!

But maybe there is a small silver lining in this oil price crisis. With oil becoming so commonly cheap, there'll be little or no price advantage to ISIS/ISIL/Daesh to market stolen oil at cut-rate prices and what revenues it does generate will be insignificant to its overall war needs.

[smedly]

Oil prices have been tumbling for a while now to a new lows, still, airline ticket price remain almost

the same and no one raises the question why, now that the barrel of crude is at $35 and going down,

will airfare get cheaper? I don't think so...

The airline one is very complicated, you have a lot of code sharing going on especially with airlines whos base of operations is a central hub like Abudabi Dubai and to some extent Mumbai and Deli the latter two have not exploited the potential

Code sharing = co-operation between different airlines in order to fill aircraft to and from central hubs, this also reduces competition and price competition considerably as they are all supporing each other - they become partners in an otherwise very competitive market, hence we see airline flight prices remain high and very similar between various carriers, IMO if falls just short of an airline take overs which would attract the attention of regulators and fair competition, who loses ? well we do "the customers" because it amounts to price fixing

[pookiki]

A 25 basis point raise in interest rates and the sky is falling? The whole issue of low interest rates and 'quantitative easing', in it many iterations, was to drive the stock markets up. The shuck and jive can only last so long. Capitalism has only two sides/cycles - boom and bust. Guess where we are headed now? And interest rates have nothing to do with it!

[retarius]

A real shame to see OPEC suffering. Why aren't they being busted by the Feds for racketeering? If they can go after my personal hero, Sepp Blatter, why can;t they go after head-chopper extraordinaire, King Salman?

[elgordo38]

Higher Fed rate would induce higher household savings, or at least, less household debts, due to increase in the cost of borrowing. Isn't this is a positive factor?

Lower oil prices would cause some deflation in consumer prices, or at least tame inflation, which is another positive factor.

These two factors are negative only to those who borrow to speculate.

Like most government numbers being thrown out world wide they look awfully "rubbery" in nature.

[elgordo38]

Oil prices have been tumbling for a while now to a new lows, still, airline ticket price remain almost

the same and no one raises the question why, now that the barrel of crude is at $35 and going down,

will airfare get cheaper? I don't think so...

I don't think so either. This is a gold rush for airlines. After 7 lean years the 7 fat years are here and they will make hay while the sun shines. They are still shaving costs i.e. narrower seats, extra bag charges, charges for this charges for that toilet tax the list is endless. They are finally learning from the banks about extra charges. Every little bit helps.

[ggt]

The .25 interest increase was more symbolic than punitive...the Fed will take a wait and see attitude before they make any decision to raise rates again...they will jaw-bone more rate increases...while waiting anxiously for world/us economic data to be analyzed...before making a directional decision..

They could just as easily back-track on the rate increase and start QE (Quantitative Easy - dumping gobs of cheap money into circulation) so Wall Street and the Big Banks can continue to gamble with the US and world's economic future...while padding their personal bank accounts...

This is extreme white collar corruption...empowered and sanctioned by a suspect and complicit US government...IMHO

Edited December 19, 2015 by ggt