The Fed’s action reflects its belief that the economy has finally regained enough strength 6 1/2 years after the Great Recession ended to withstand higher borrowing rates. The S&P 500 and the Nasdaq also advanced about 1.5% apiece. Based on short-term interest rate futures markets, traders expect the next rate hike in April.
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Federal Reserve Chairwoman Janet Yellen has given broad hints that a rate increase today is likely.
“We mustn’t wait until all the danger lights are flashing before we make these first rises in interest rates, because then we’re going to have to raise interest rates quite rapidly, and that’s really what the MPC wants to avoid”. It’s expected to be a 0.25 percent hike, which is a small and anticipated increase, NBC News reported. Rates for new mortgages have already inched up in anticipation of the Fed’s move, Bankrate.com reported last week.
“The Fed is going out of its way to assure markets that, by embarking on a “gradual” path, this will not be your traditional interest rate cycle”, said Mohamed El-Erian, chief economic advisor at Allianz.
The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising USA rates sets in.
The Federal Reserve is widely expected to raise interest rates in the USA this afternoon.
Markets and analysts will focus on the exact language the Fed uses in its statement to justify the hike and describe how it will evaluate the timing of a second and subsequent steps.
The junk bond fears are exacerbated by the crash in oil prices, which has caused a wave of energy defaults. The contract rose $1.04, or 2.9 per cent, to settle at $37.35 a barrel on Thursday. The two biggest junk-bond ETFs surged by the most in almost a year, stemming a rout that’s seen three high-yield funds halt cash redemptions as investor demand drained their liquid assets. The yield on the 10-year Treasury note, the benchmark rate for debt, rose to 2.30%, compared with 2.27% the day before. As the balance sheet swelled to historically high levels, the blue chip index hit 38 record highs in 2014 and six this year, most recently on May 19. If it’s more than that, investors will read it as a sign that the Fed will go even slower in 2016 than expected.
Investors expect a range today of $1.3668 to $1.3825 Canadian for the US dollar. The euro edged up to $1.0946 from $1.0929. Tweaking a coupe of its official interest rates for operations in the market should achieve the desired result, but rates have been so low for so long that there are some dangers here of what is being called a “bumpy take-off” in the actual manoeuvre of increasing rates.
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Borrowers with private loans may see their rates go up, however.
