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Focus is on Federal Open Market Committee

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The phrase "behind the curve" has cropped up in recent discussions about this week's US Federal Open Market Committee (FOMC) meeting where a 25 basis-point interest rate hike is virtually assured.

Bank of America-Merrill Lynch, for example, in its March 9 Liquid Insight, said despite the 60 per cent Fed hike probabilities going from 40 per cent to 100 per cent in the past fortnight, stocks are higher, credit spreads are tighter, and interest rate volatility and the VIX Index's - which measures the options market's estimate of future - volatility are lower.

"While this has allowed the Fed to have its cake and eat it too at the March meeting, in our view, there could be a bigger sign from the markets to the Fed: financial conditions could be at the cusp of signalling that policy is behind the curve," said BOA-ML.

"Ultimately, financial conditions that fail to tighten in response to a hawkish Fed could raise concerns of a more hawkish policy stance (higher dots and/or active balance sheet talk)."

Nanyang Business School Professor Lee Boon Keng, in his commentary The Fed Is Grossly Behind The Curve last week, said inflation will quickly come into focus.

He said: "The Fed has held back on raising interest rate last year to err on the side of caution.

"This year, it would become increasingly clear that the Fed is grossly behind the curve and would have to do some serious catching up."

Tighter money is not altogether a bad thing as far as economic growth is concerned.

Morgan Stanley, in its Feb 27 report Emerging Markets Recovery Unlikely To Get Undermined, said emerging markets (EM) growth continues to gain pace, with an increasing number of EMs in recovery mode.

It said: "Manufacturing Purchasing Managers' Index and industrial production growth have held up in most EMs, despite higher US interest rates.

"Tight monetary policy stance, reflected in high levels of real interest rates, has helped to restore macro stability in EM countries which previously faced adverse highflation."

Staying with the theme of EMs seeing a recovery, Mr Kim Catechis, head of global emerging markets at money managers Martin Currie, said these markets have passed an inflexion point and are rebounding.

He said: "As for the impact of US interest rate rises, this should not be overstated. Traditionally, investors have viewed increasing rates in the US as wholly negative for emerging markets, as it strengthens the dollar and therefore makes debt denominated in this currency more expensive to service.

"It is not that clear cut because rise in rates is overwhelmed by increase in growth in the early stages of the rate cycle. It is only when growth is weakening that rate rises are negative."

In the Fed's defence against accusations it has left it too late, it has opted for caution because, like the rest of the world, it does not know what fiscal and spending policies the Trump administration intends to pursue.

Other than declarations that "it's going to be huge", there have been no specifics, and going by Wall Street's recent wobbles, the market may be starting to feel a little uneasy about this.

Moreover, the reaction to President Donald Trump's proposed changes to US healthcare announced last week have been that it is simply "Obamacare-lite", and it benefits only the rich - because tax breaks are available only to those earning at least US$500,000 (S$706,000) a year.

There is also the claim that it as been hastily put together, lacks substance and will be difficult to win legislative support.

Hopefully for the bulls, the same won't be the case for whatever tax plan is eventually unveiled.

This article appears in The Business Times today. For full listings of SGX prices, go to

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