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19 Mar 2013

International Economy

All Eyes on Upcoming Fed Meeting: Further QE Initiatives Expected (Business Brief No.3416)

In an upcoming meeting of the Federal Reserve on March 19-20, KResearch expects that FOMC will likely resolve to continue their quantitative easing measures, as well as to hold their policy rate steady at the current lowest level. Despite improved performance in the US economy, the US is still seeing relatively high unemployment, and household consumption is expected to be under pressure due to payroll tax cut expiration. In the near future, the US economy may still face added fiscal risks due to an unresolved public debt ceiling and negotiations on their 2014 budget legislation. There is also a possibility that the Fed may cut growth estimates lower than their December 2012 forecast due mainly to the recent sequestration.

In the event that the Fed keeps current QE measures, it would add pressure to central banks in ailing economies to adopt similar easing, as seen in the BOJ's move to employ such stimulus. This could impact Thailand when global fund inflows veer into emerging markets – especially Asia, where economic growth is higher – seeking higher returns. Part of these speculative inflows may go into risk assets, a scenario that could cause bubbles in the property and stock markets here. However, amid a highly vulnerable world economy, if unprecedented setbacks occur, those large capital inflows would be pulled back, causing great volatility in the invested markets. To monitor US economic development is therefore becoming essential, since it will directly influence the Fed's policy decisions. If US economic performance continues toward stability, the Fed may consider scaling back, or dropping, QE measures, which in turn would cause some withdrawal of capital from Asia and Thailand. This would affect asset prices here, where significant market corrections could then be expected.

International Economy