After a big policy reform from the European Central Bank, all eyes will be set on US Federal Reserve Bank when it will meet on Tuesday to decide on possible interest rate increase this year.
The US Central Bank is expected to maintain the course on its monetary policy in its Wednesday statement and levy stress on patience in waiting to analyse whether the American economy is strong enough to withstand the first hike in the federal funds rate since 2006.
The European Central Bank last week announced a major bond-purchase program, or quantitative easing (QE), to avert deflation and stimulate growth in the crisis-hit euro zone, which comprises 19 nations. The QE was expected in order to assist the major US trade partner in the short term.
But ECB’s raised stimulus measures and elsewhere across the globe, including the Bank of Canada, may make it harder for the Federal Reserve to move ahead with its own plan to commence increasing interest rates by mid-year.
The timing of the rate move by the US Central Bank has remained a top concern for the investors. The US stocks rallied when the Federal Reserve said after its meeting in December that it would maintain a patient approach toward hiking interest rates and provide an upbeat assessment of the American economy.
The more-than-expected stimulus package by the ECB on Thursday boosted the US stocks, while helping the indexes to post gains for the week after three continuous weeks of losses.
Erik Davidson, chief investment officer for San Francisco-based Well Fargo Private Bank, said, “Global central policy is not one of their mandates, but I think they have to acknowledge it, because this is not just global economic headwinds, this is actually the moves of other central banks. They’ve got to take that into account.”
“The big wild card is what happening on inflation,” said Stephen Oliner of the American Enterprise Institute.
Oliner said if the inflation remained “anywhere close” to the 2.0 percent target of Fed, “the Central Bank would have definitely been tightening its monetary policy in the first half of this year.”
Oliner, who had also served for more than 25 years in the Federal Reserve board, said, “My best guess would be September. I know the majority of opinions is for June but when I think about the information that they will have about inflation when they have the June meeting, I`m not sure there is going to show inflation moving back toward their target.”
Will the US increase interest rates when other big economies are being more expansive, remains a million dollar question, at least till Wednesday when the Fed will come out with its policy statement.