On Thursday, the Federal Open Market Committee kept the federal fund rate unchanged at 5.25%.
Phrase of the week: neutral bias.
NEW YORK (Reuters) – The Fed’s shift toward a more neutral bias on interest rates is likely to deal a blow to the dollar in the longer term, but bears expecting a sharp fall in the currency may have to wait a little longer yet.
The dollar slumped to a two-year low against the euro on Wednesday after the Federal Reserve left interest rates on hold at 5.25 percent but dropped a phrase in its statement pointing to future monetary policy tightening. [Shift in Fed tone signals dollar down but not out. Reuters. March 22 2007.]
The Fed is expected to cut rate later this year; a rate cut signals an economic slowdown.
Given Malaysian dependence on the US market, I am convinced that Malaysia would be affected.
The ancients said, all roads led to Rome. With slowing US economy as well as stronger ringgit which hurt local export, this particular road might lead to Rome indeed. So, I am confident of winning this bet.
Our own Bank Negara left our interest rate as unchanged at 3.50% at the last monetary policy meeting on February 26. If the Bank Negara is worried about slowdown, it should cut down rate. In the news however, the Malaysian central bank seems to be very bullish given current circumstances:
KUALA LUMPUR: Bank Negara is confident Malaysia’s economy will remain resilient and grow at a healthy 6% despite moderate global growth predicted for the first half of the year. [Bank Negara says economy still resilient. The Star. March 21 2007.]
If Bank Negara is as bullish as it says, conventional wisdom would either advice the central bank to either increase the rate up or leave it be, depending on the situation, if inflation is the bank’s main concern.
