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Psychological Effects of Economic Shifts
2019-01-07 15:56:46
Khristian Maclang

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Photo Source: AgnosticPreachersKid via Wikimedia Commons

The U.S.Federal Reserve raised interest rates, which has evoked reactions in Asian markets and significantly affected oil prices.

Asian markets are growing increasingly cautious in the wake of the U.S.Federal Reserve raising interest rates today, which marks the second interest rate hike this year.

In general, markets anticipated this.

The central bank announced it would add 25 basis points to the benchmark interest rate in lieu of inflation registering lower than the Fed forecasted.

The Fed also elucidated its means to untangle its enormous balance sheet.

The reactions of organizations and whole indexes around the world exemplify, as they often do in response to the Fed, psycho-economic phenomena.

Business and consumer psychology, separate fields unto themselves albeit with the obviously considerable overlap, are both impacted by adjustments to interest rates or, rather, just the rates themselves.Businesses and consumers alike recoil in their spending when interest rates start rising, and it doesn’t necessarily have to be a conscious decision on the part of the latter.

Consumers, whether individual or family units, often adjust their spending habits (if at all) in response to fluctuations in their own expenses from year to year and from month to month more than anything else, so regardless of whether they are aware of what causes their expenses to run high or low in any given period, those prone to adjustment simply adjust accordingly out of a feeling of being financially burdened to a lesser or greater extent.

Markets view the hike as a benevolent bump.

Giulia Lavinia Specchia, ANZ economist, said the Fed’s description of the economy as being “slightly softer” and their delineation of the balance sheet normalization probably relieved the central bank of some of the pressure to tighten things further.

Markets show no faith that the Fed will hold fast to its initial forecast of three interest rate increases this year.

“Traders clearly doubt the inflation outlook espoused by the Fed,” said Michael McCarthy, CMC Markets chief market strategist.

“With little traction evident in wages or inflation, the markets are expressing skepticism about an ongoing recovery.” Robert Heller, ex-Fed Governor, said he sees one more increase in 2017.

“I think the Federal Reserve will do one (more) hike and that is just because they want to go slow and try to avoid anything that might upset the markets, not that I think the markets wouldn’t be able to take a stronger increase and a faster pace of normalization,” said Heller, adding that he’s hoping for long-term rates at about 3 percent.

The psychological effects on businesses and consumers is significant not only on the basis of their financial wellbeing but also because it has economic implications.

In much the same way that one mentally stressed person can be pushed to the point of doing public harm, the mental state, figuratively speaking, of these consumers and businesses can do considerable harm to sectors of the economy because, when they curtail spending in response to rising interest rates, it causes stock prices to drop, which is only one of many examples of the psycho-economic effects that can manifest on the stock market.

Oil prices plummeted overnight to a seven-month low partly as a result of an increase of U.S.gasoline stocks, which has yielded steady decline prior to this news, but the Fed’s announcement did coincide with yet another drop, thus pointing to different psycho-economic effects altogether.

This brought Brent crude down 0.04 percent to $46.98 per barrel and dropped U.S.crude 0.18 percent to $44.65 a barrel.

Ultimately as with interest-rate-sensitive property stocks in China, the dollar index or the Hang Seng Index, the Fed’s decision to raise interest rates presented an economic condition to which many different entities around the world had an emotional response, and this colors macroeconomics differently than many often would because it illustrates just how much is NOT governed by concrete numbers but, rather, by the hopes and fears of those with the power to make decisions that affect others.

The Hang Seng Index fell 0.91 percent, yet the Shanghai Composite notched infinitescimally higher by 0.03 percent.

The Shenzhen Composite also went up by 0.227 percent.

With Chinese markets mixed, Japanese markets lost out with the Kospi declined 0.75 percent, losing earlier gains, and the Nikkei inched down 0.6 percent.

Australia’s S&P/ASX 200 dropped 1.13 percent, partly due to the struggles of its materials and energy sub-indexes; each of which were down 2.3 percent and 2.31 percent respectively.

Big banking and mining stocks essentially ran damage control, trading in the red.

The dollar index—the mechanism that tracks the dollar’s shifts against several other currencies—proceeded to trade under the 97 handle at 96.858 by 9:35 a.m.HK/SIN.

The dollar’s movement was essentially flat against the yen.

The Australian dollar, meanwhile, leapt as far as $0.7625 as compared to the $0.7587 of an earlier session, this in response to the Fed’s announcement.The month of May saw 42,000 new jobs, which beat expectations of about 10,000.

New Zealand saw 0.5 percent GDP increase for the first quarter, a gain 0.7 percent lower than forecasted but landing 0.2 percent higher than the 2.5 percent gain averaged annually.

The Kiwi also dropped 0.29 percent against the dollar in the aftermath of the new data.

The Fed’s FOMC statement gave its comprehensive assessment of the state of the economy, stating the job gains slowed but remain positive on average this year with a measurable decline in unemployment.

Household spending reportedly ticked up in the last few months, and business fixed investment kept growing.

Inflation was said to have declined on a 12-month basis lately, maintaining just under 2 percent. “Market-based measures of inflation compensation remain low;

survey-based measures of longer-term inflation expectations are little changed, on balance.”

The statement’s explanation of its balance sheet normalization plan was partly based on sustaining existing policy with regard to the reinvestment of principal payments from the Committee’s agency debt and mortgage-backed securities holdings.

“The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans,” said the Fed.

That addendum details the process by which the Fed intends to unwind its balance sheet.

Oil prices dropped nearly four percent overnight due to the revelation of U.S.gasoline stocks building.

After the second rate hike of the year, pundits forecast another before fiscal year’s end.

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