After skyrocketing in September 2022, US inflation has retreated significantly. The US Department of Labour reported on Thursday (10/11) that Consumer Price Index (CPI) inflation grew 7.7% (yoy) in October 2022, down significantly from 8.2% in September 2022.
Financial markets immediately welcomed the new data. The US stock market, Wall Street, rallied, with the S&P Index soaring 5.5% to a level of 3,966.37, the best one-day performance in the past two years. (10/11)
Stock markets in Asia also reacted on Friday (11/11). The MSCI Index for Asia-Pacific shares, excluding Japan, rallied 3.72%, Australia's S&P/ASX 200 Index jumped 2.43% and the Japan's Nikkei climbed 3%. Meanwhile, the US dollar experienced a sharp decline after a smaller-than-expected slump in US consumer prices.
Such conditions prompted expectations that the US central bank, the US Federal Reserve (the Fed), would pare back its aggressive pace of benchmark rate hikes after raising the policy rate 75 basis points at the Federal Open Market Committee (FOMC) meeting on 1st-2nd November 2022. The decision pushed the US benchmark rate to 3.75-4.00%, the highest level in the past 14 years.
The Fed has been aggressively raising interest rates to rein in record inflation in the country to below 2%. The BBC's business correspondent for North America, Michelle Fleury, called the four consecutive interest rate hikes of 75 basis points the fastest in the history of global monetary policy.
In his speech, however, the Fed Governor, Jerome Powell, called inflation in 2022 challenging. This also necessitates tighter policies by the Fed to narrow the possible occurrence of a recession amid economic recovery efforts.
The latest US inflation data spurred hope that the US economy would not slip into recession, as seen by rising commodity prices on Friday (11/11). The global price of crude, namely West Texas Intermediate (WTI), increased 1.47% to USD87.94 per barrel for December 2022 delivery.
Meanwhile, the price of Brent oil futures increased 0.3% to USD93.96 per barrel in early trade for January 2023 delivery. The prices of both futures contracts posted strong gains after US inflation data was released, despite weekly losses of 5-6%.
In the domestic markets, the inflation data boosted Jakarta Composite Index (JCI) performance, trading up to close on Friday, 11th November 2022 at a level of 7,829.21. Similarly, the rupiah strengthened to Rp15,506 per US dollar in line with a weaker US dollar index, decreasing 107,790.
Financial and commodity markets reacted jubilantly to the latest US inflation data. It is important to note, however, that 7.7% (yoy) inflation is well above the 2% target, implying that the US still faces the threat of recession, and the Fed will continue to raise interest rates.
According to the markets, after the inflation data was released, the probability of a 50bps hike to the policy rate in December increased. Based on the CME FedWatch Tool, the probability that the FFR will reach 4.25-4.5% next month increased significantly to 90% from 56% one day earlier.
Such data clearly shows the markets already expect interest rates to be raised by 50 basis points, despite some uncertainty.
Meanwhile, the probability of the previous 75bps FFR hike was also high at 44%, implying no change in US interest rate projections. The markets will feel relief only if the Fed avoids hiking interest rates again so aggressively, namely by 75 basis points.
In his speech on 2nd November 2022, Jerome Powell also stated that it was too early to think about pausing for a while. “So people, when they hear lags, they think about a pause. It is very premature in my view to think about, or be talking about, pausing our rate hike. We have a ways to go," said Powell in his speech.
Moving forward, this means there is still room for the Fed to aggressively raise the benchmark rate.
Bank Indonesia (BI) has also stated that the Fed's policy will remain aggressive for longer. In effect, this will maintain the strong US dollar. For Indonesia's domestic markets, however, several studies concluded that policy coordination could reduce the effects of the Fed's aggressive policies and strengthen the national economy and domestic markets in Indonesia.
Utama, Insukindro and Fitrady (2022) found that during this period of US turbulence, the Consumer Sentiment Index (CSI) in Indonesia has tended to increase. In addition, Simorangkir and Adamanti (2010) concluded that a combination of fiscal and monetary policies effectively stimulated production in all economic sectors in Indonesia during the global financial crisis.
References
Bank Indonesia, 2022. Monetary policy report quarter III 2022. Jakarta: Economic and Monetary Policy Department, Bank Indonesia.
Coxx, J. (2022). Fed approves 0.75-point hike to takes to highest since 2008 and hints a change in policy ahead. Diakses melalui https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html pada 03 Nopember 2022.
Goodkind, N. (2022). The Fed makes history with fourth strike three-quarter-point rate hike. Diakses melalui https://edition.cnn.com/2022/11/02/economy/federal-reserve-meeting-inflation/index.html pada 03 Nopember 2022.
Imbert, F. (2022). Full recap of the latest Fed rate hike and chair Jerome Powell's market-moving news conference. Diakses melalui https://www.cnbc.com/2022/11/02/real-time-updates-of-big-fed-rate-hike-and-jerome-powells-news-conference.html pada 03 Nopember 2022.
Sahadi, J. (2022). What rising interest rates mean for you. Diakses melalui https://edition.cnn.com/2022/11/02/success/what-rising-interest-rates-mean-credit-mortgage/index.html pada 03 Nopember 2022.
Sherman, N. (2022). The Fed hikes US interest rates to fresh 14-year high. Diakses melalui https://www.bbc.com/news/business-63488472 pada 03 Nopember 2022.
Simorangkir, I., & Adamanti, J. (2010). The role of fiscal stimulus and monetary easing in Indonesian economy during global financial crisis: Financial computable general equilibrium approach. Bulletin of Monetary Economics and Banking, 13(2), 165-186.
Utama, C., Insukindro, & Fitrady, A. (2022). Fiscal and monetary policy interactions in Indonesia during periods of economic turmoil in the US: 2001Q1-2014Q4. Bulletin of Monetary Economics and Banking, 25(1), 97-116.
