The US Federal Reserve has increased interest rates by 0.25% after seven years at near zero.
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Though some in the markets question the ability of the US economy to withstand higher USA interest rates, there is relief that the uncertainty over the Fed’s intentions is coming to an end.
“We expect the (Federal Open Market Committee) to emphasise that its tightening cycle will be gradual”. The Federal Reserve, the world’s most influential central bank, is widely expected to raise its key interest rate, now at a record-low zero, by a quarter of a percentage point.
That’s because almost everyone believes the Fed is going to raise interest rates for the first time since June 2006. It increased rates 16 more times over the next two years.
Equities fell sharply in September after the Fed made the surprise decision to keep rates on hold, confounding expectations for a rise. Fed Chair Janet Yellen indicated her strong backing for it on December 2 when she said that the Fed expects the economy will continue to grow steadily through 2016 and that the challenges of low inflation and jobs market slack will diminish next year. The yield on the 10-year Treasury note, the benchmark rate for debt, rose to 2.30% immediately after the news but then receded back to where it started the day at 2.27%. Fed officials also anticipate slightly less inflation and slightly lower unemployment in 2016 compared to their prior estimates.
The prospect of gradual rises could bring some stability to markets, but if the Fed were to raise rates more quickly, markets may take fright, analysts said.
The far safer market for USA government debt is also responding to the Fed decision.
Investors with broadly diversified portfolios of domestic and global equities, fixed income securities across the credit and maturity spectrum, and cash should be well positioned for whatever the market has in store.
The likelihood of such an outcome is pegged at over 80% by futures markets, but what would a United States rate hike mean for the global currency markets?
But Gary Stern, the former head of the Minneapolis Fed, said the more important consideration is the Central Bank’s success in meeting its dual mandate: keeping unemployment low and prices stable. Combined with expectations for future rate moves, it also guides longer-term interest rates which affect how much people pay on loans to buy homes and cars, how much businesses pay on their borrowings, and how much banks pay for deposits.
Traders see an 81.4 percent chance of a rate hike, according to the CME Group’s FedWatch tool.
The biggest loser right now against the dollar is the South African Rand, which along with jitters about the Fed, is still feeling the impact of South Africa’s president Jacob Zuma sacking two finance ministers in less than a week.
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Over the first three quarters of this year, USA real GDP is now estimated to have advanced at an annual rate of about 2 percent, and economists forecast a similar rate of growth in the fourth quarter.
