Stocks in Europe gained, however, as investors took the Fed hike as a sign of confidence in the world’s largest economy.
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For the first time since 2006, the Federal Reserve last night made a decision to hike the rate by 25 basis points after keeping them at near zero levels for a prolonged period.
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Another sustained rise in the dollar could spell further trouble for commodities, by making them more expensive when measured in other currencies.
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“But what is clear is that there will be no sudden spiral of further rate rises – and for stocks, Christmas has come early”. Economic Affairs Secretary Shaktikanta Das said on Thursday the Federal Reserve’s accommodative monetary policy was good for emerging market economies and that large-scale selling by foreign funds was not expected.
In such circumstances, the USA move to raise its benchmark interest rates is risky.
“If the Fed is going to raise the rate four times next year, eventually higher USA interest rates are very negative to the price of gold and also the higher U.S. dollar is quite negative”, Bob Takai, chief executive officer and president of Sumitomo Corporation Global Research, said from Tokyo. In its most recent projections, the Fed lowered its expectation for 2016 core inflation growth to 1.6 percent, down from its previous 1.7 percent expectation.
Yellen, in her news conference immediately following Wednesday’s decision, also emphasized that rate hikes, though gradual, would not necessarily be all a quarter of a percentage point or evenly spaced in the calendar year.
Additionally, banks and non-banking financial institutions including insurance companies, asset managers and brokerage firms benefited from the rate hike. USA stock index futures were up more than 0.3 percent; Nasdaq futures up about 0.45 percent, pointing further gains in United States markets today. The latest reading on core PCE showed a 1.3% year-over-year increase.
The Fed signaled the pace of future increases would be gradual and will depend on how the inflation outlook evolves. Even so, he said, there’s “some kind of probability”, perhaps about 10 percent, that a shock could hit the economy and send it back into recession.
ENERGY: In the oil markets, the mood remained fragile.
Despite the upbeat sentiment, oil prices remain bolted to seven-year lows.
The Fed action leaves gold positioned for some modest gains, largely from short-covering, but much of the impact on bullion will come from the dollar move, he said.
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“The fact that reserve balances of financial institutions at the central bank have grown from $15 billion in 2007 to now $2.5 trillion makes the Fed’s task more hard”.
