An economic downswing in South Africa was averted last week when the US Federal Reserve opted not to taper off its policy of quantitative easing.
This entails buying up large quantities of government bonds in order to boost the US economy. Quantitative easing indirectly boosts other economies around the world, including our own, as spending in the US improves.
Economists had been predicting that the Fed would ease off on quantitative easing, and markets had started trembling in anticipation before the crucial two-day meeting last week.
However, Federal Reserve Chairman Ben Bernanke said the decision to continue the stimulus had been made because the US economy was still too weak, and conditions in the job market were “far from what all of us would like to see,” with an unemployment rate of over 7,3%.
The Fed’s decision benefits emerging markets in the short term – the value of the rand rose to R9,61 last Thursday, 20 cents stronger than the previous day. However, analysts are now predicting that the tapering could begin later in the year, possibly in December.
"If the Fed had acted as expected, a lot of uncertainty would have been removed,” says Rand Merchant Bank currency analyst John Cairns, quoted in Business Day. “As it is, the uncertainty remains and so too will volatility," he said, describing the Fed’s decision as “stunning”.
“The Federal Reserve’s decision shows the extreme sensitivity of our currency and stock market towards the Fed’s monthly bond-buying programme,” says Bertus.
“Talk of a tapering in December tells us we are still in for a rough ride for some time. Bloomberg has reported the 52-week range at R8,16 to R10,50 – a stark reminder of the extreme volatility we face.
“Nevertheless, for now, the Fed’s decision is good news for us.”