Based on the latest Federal Reserve Open Market Committee (FOMC) minutes most officials agree that US economic growth is strengthening in the second quarter of 2016, while inflation is heading toward the targeted 2 percent (y/y) level. Although US GDP growth in Q1-2016 was recorded at a moderate 0.5 percent (y/y), the slowest growth pace in two years, most officials at the FOMC are not concerned about the emergence of a sudden reversal or slowdown in the nations economic growth because conditions in the labor market continue to improve (this improvement implies strong underlying economic fundamentals).

This is a different tone from the March 2016 minutes when Fed officials stated that the decline in worldwide stock markets and contracting financial markets around the globe could have a dampening effect on Fed officials ambition to raise the Fed Fund Rate. In the first quarter of 2016 markets had been under severe pressure due to concerns about Chinas slowing economic growth.

In December 2015 the Federal Reserve hiked its key rate (for the first time in nearly a decade) from the range of 0.00 - 0.25 percent to the range of 0.25 - 0.50 percent. Prior to this rate hike the US Federal Reserve had been committed to an ultra accomodative monetary policy (including historically low interest rates and the generous quantitative easing programs) in an effort to boost economic growth of the worlds top economy. In that era of cheap US dollar many funds were invested in higher-yielding (yet riskier) emerging markets, including Indonesia. When in mid-2013 the Fed started to hint at the winding down of the QE program emerging markets were immediately hit by severe capital outflows.

Rising expectations of a June Fed Fund Rate hike cause a sharply strengthening US dollar. By 13:00 pm local Jakarta time the Indonesian rupiah had depreciated 1.09 percent to IDR 13,526 per US dollar. Overall, emerging market stocks and currencies fell to two-month lows after the release of the hawkish Fed minutes on Wednesday (18/05).

Bank Indonesias benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.11 percent to IDR 13,467 per US dollar on Thursday.

Source : Indonesia Investments

May 21, 2016