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26 Jul 2018

International Economy

FED is likely to maintain the interest rate at 1.75-2.00% at its meeting on July 31-August 1, 18...close attention to trade dispute (Business Brief No.3754)

             KResearch expects the Federal Reserve (Fed) to hold the policy rates steady at 1.75-2.00 percent during the fifth round of the Federal Open Market Committee (FOMC) meeting this year. The risk factor - that may disrupt the path of the US economic recovery in the remainder of this year - is still the ongoing trade dispute between the US and its main trading partners, especially China. The trade spat could slow the US' economic growth. Nonetheless, strong fundamentals of the US economy should enable the Fed to further increase the policy rates gradually another 1-2 times during the remainder of this year.

          Looking forward, the Fed may face more serious challenging factors in implementing monetary policies particularly in 2019, when the policy rates are likely to adjust close to a neutral rate of interest. The strong US economy may allow for more rate hikes in the next 6-12 months on a backdrop of limited impacts from the trade war. However, the Fed will encounter a more ominous development from the expected lackluster inflation that could result in the inverted yield curve. If it is the case, the Fed may be forced to revise its signal on monetary policy in the future when the policy rates are moving close to the neutral level. Also, the Fed will have to weigh between factors contributing to continuous economic recovery and factors threatening the long-term stability.

            With regard to the impact on Thailand, the likelihood of further policy rate increases by the Fed may continue to affect Thai financial markets as seen by capital outflows and weaker Thai Baht. At the same time, currencies of emerging economies including Thai Baht can become more vulnerable, especially during the Fed meeting in September this year, when another policy rate hike is imminent.  Thailand's solid external stability may enable the Monetary Policy Committee to maintain the policy rate at 1.50 percent for a while to support Thailand's economic growth amid the risks from ongoing trade disputes. However, financial costs may eventually increase in line with the global financial market trends. Therefore, Thai business operators and the public should get ready for such possible changes to minimize the impacts from an increase of financial costs.​

International Economy