Geopolitics and monetary policy and deflation! Oh my!
It was a wild, wild week. First, the Russian central bank announced a massive rate hike and the country’s main deposit rate rose from 10.5 percent to 17 percent. The move was the largest single increase in Russian rates “since 1998, when Russian rates soared past 100 percent and the government defaulted on debt,” according to Bloomberg.com.
The central bank was desperately trying to shore up the ruble which was suffering from lower oil prices and Western sanctions imposed after Russian annexed Crimea. The rate hike wasn’t immediately effective and the ruble sank to a record low. The currency has lost 52 percent of its value during 2014 to date, and the outlook for the future of the country’s economy isn’t bright. If oil averages $60 a barrel, Russia’s gross domestic product – the value of all goods and services produced in the country – might fall by 4.5 percent to 4.7 percent in 2015.
Events in Russia put investors in a selling mood, and stock markets around the world moved lower early in the week. Barron’s commented, “From all appearances, investors were selling stocks while they were doing their holiday shopping.”
The investor stampede was headed off by a bit of whooping and hollering from the Federal Reserve. After the Federal Open Market Committee meeting, the Fed announced its policies remained unchanged:
“…Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”
The Fed’s decision was enough to calm markets, many of which showed attractive gains by week’s end.