Fed Seen Held Back by Markets
Financial market turmoil worldwide is again boxing in a Federal Reserve Board that would very much like to raise interest rates to slow the U.S. economy--and slow Wall Street’s bull stock market, many experts say.
The confluence in recent days of plunging commodity prices, another dive in Asian currencies and stock prices, spillover to Latin American and Russian markets and a soaring U.S. dollar all mean that the Fed, which meets today, risks an economic and political firestorm if it moves to tighten credit now. Consider:
* Prices of such commodities as crude oil and silver slid Monday, extending what are already heavy losses for many commodities this year. The Commodity Research Bureau index of 17 raw materials sank 1.2% to 219.27, its lowest level in 4 1/2 years.
East Asia’s economic devastation is cutting demand for oil, copper, silver, grains and other materials, pushing prices down, experts say. What’s more, the Organization of Petroleum Exporting Countries, which vowed production cutbacks in March, hasn’t been able to arrest oil’s slide.
Near-term crude oil futures dropped 40 cents to $14.07 a barrel in New York on Monday, the lowest since March.
In the United States, falling commodity prices mean potential cost savings for businesses and consumers. That puts further downward pressure on the U.S. inflation rate--making it tougher for the Fed to justify tightening credit, especially in the eyes of its critics in Congress.
* Indonesia’s deepening economic and political crisis helped fuel another sell-off in many Asian stock markets Monday.
Indonesia’s main market index dropped 4.2%, Malaysian stocks sank 3%, the Thai market fell 3.3% and Hong Kong’s Hang Seng index was off 1.3%.
As these markets continue to crumble--and as Indonesia borders on anarchy--a rise in U.S. interest rates would be the equivalent of kicking a dying man. “There is already an attractive case to be made for withdrawing money from Asia and putting money in the United States,” said economist Robert Dederick of Northern Trust Co. in Chicago.
Worse, heavy selling hit Latin American and Russian markets Monday, as investors apparently decided that the risks of staying in other “emerging” markets--in light of Southeast Asia’s fresh decline--are becoming extreme.
In Mexico City, the main stock index slid 139.67 points, or 2.9%, to 4,646.51. In Brazil, the Bovespa stock index tumbled 6.4% to 10,205. In Argentina, the Merval index fell 4.8% to 637.02.
Meanwhile, Russian stocks dived 12% after the Bank of Russia sharply boosted interest rates Monday, trying to shore up the ruble’s value as Southeast Asia’s turmoil sours investors on most developing markets.
(The only significant bright spot among such markets: Chinese stocks available to foreigners. Oddly enough, despite East Asia’s sinking markets--or perhaps because of them--foreigners have been seeking the relative safety of Chinese equities. Indexes of mainland Chinese stocks that foreigners may own--so-called B shares--have gained 2.8% in Shanghai since Wednesday. Hong Kong-traded Chinese issues also are up.)
* The dollar zoomed against Japan’s yen Monday, reaching 136.25 yen in New York, up from 134.52 on Friday and a 6 1/2-year high.
Currency traders fear that East Asia’s woes will continue to drag down the already reeling Japanese economy, as demand declines among Asian trading partners for Japanese goods and services.
In addition, leaders of the Group of Eight leading industrial nations, who met in Britain over the weekend, didn’t pressure Japan to strengthen its currency or to do more to boost its economy.
That raised speculation that the yen could get much weaker. If the Fed chooses to raise U.S. interest rates, it could quickly exacerbate the trend, given that Japanese interest rates are already so low relative to U.S. rates.
A newly plummeting yen would slash prices of Japanese exports to the U.S., boosting Japan’s trade surplus--a political hot potato for the Clinton administration.
Given all of these pressures, Fed Chairman Alan Greenspan and company are likely to leave their key short-term rate at 5.5% today--albeit reluctantly, most economists say. But many also don’t believe the Fed’s restraint will last long.
Bloomberg News was used in compiling this report.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Down Again
Key commodity prices tumbled Monday, adding to heavy losses year-to-date in many grains, metals and other commodities. A sampling:
*--*
Commodity Mon. YTD Copper -5.9% -5% Silver -5.1 -11 Crude oil -2.8 -20 Cocoa -1.4 +5 Orange juice -1. +30 Gold -0.6 +4 Wheat unch. -7% Corn +0.3 -7 Cotton +0.6 -3 Coffee +1.7 -24
*--*
Note: Price changes in most active near-term futures contracts.
Source: Bloomberg News
