Quick look at the week ahead
This week could be pivotal in terms of how central banks around the world adjust their inflation control strategies, and this could have a huge impact on American markets, interest rates, and economic performance going forward. The key event is the US Federal Reserve’s announcement on the size of its next interest rate hike, and all of the manic message decoding that comes along with that announcement. That announcement will happen during the day on February 1st in the US, so for us, it’s going to happen overnight and we’ll wake up on February 2nd to the news of what has happened. There are a bunch of terms related to the US Federal Reserve’s monetary policy that you might hear that could be confusing to anyone who is new to consuming this kind of news.
"Dovish" vs "hawkish"
First, you’re going to hear about “dovish” or “hawkish” policy. These weird bird terms refer to the nature of the US Fed’s use of interest rates. “Doves” see it as more beneficial to keep rates low to encourage economic activity and reduce unemployment, where inflation is just a necessary evil to achieve those higher order priorities. “Hawks” prioritize the use of higher interest rates to fight inflation, and are willing to accept slower economic growth and higher unemployment to fight that fight.
"Tight" vs "loose" policy
You might also hear the media and analysts refer to policy as “expansionary” or “contractionary”, or as “loose” or “tight”. In these cases, expansionary/loose interest rates are low rates that are meant to boost the economy, and contractionary/tight rates are high that are meant to slow spending and fight inflation.
The infamous "pivot"
Another term that might get a lot of play is the speculation as to whether or not the US Fed will “pivot”. COL Financial’s April Tan has used this term a lot in her recent coverage, and while a basic understanding of the word’s normal meaning (“to turn”) might help, the usage when talking about a central bank’s monetary policy is a little different. Here, when we ask whether the US Fed will “pivot”, what we’re asking is whether the US Federal Reserve considers the economic data to require a change in policy approach. The current approach is hawkish: the US Fed is raising interest rates to slow spending and cool the economy to fight inflation. If the US Fed were to reverse course and lower rates, that would be a pivot. Even if the US Fed just paused raising rates, but the statement was filled with “dovish” signals about the state of the economy, the market might look at that pause as evidence of a pivot.
MB BOTTOM-LINE
As with anything, it tends to get a little more complicated (and insane) the closer you look, but that should give you a good starting point to consume the news with confidence!
Financial news can be filled with weird terms, and shining some light on those terms to make the entire world of financial information more approachable and familiar is one of my top priorities.
Anyway, the BSP won’t meet for another two weeks after the US Fed makes its decision, so as soon as we hear from the US, the speculation will ramp up on what Felipe Medalla, the BSP Governor, will do in response.
The last time the BSP didn’t follow the US Fed, the peso fell dramatically versus the US Dollar.
Mr. Medalla will have the benefit of those two weeks to get an additional taste for how the PH economy is going, and how the peso might respond if the BSP decides to slow its rate hikes or even pause the hikes altogether.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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