Even if the Fed said it expected “only gradual increases”, the negative spillover effects brought by the rate hikes will impact emerging economies that are experiencing poor performance of financial markets and weakening outlook for macro-economy. The rate hike was a long-expected vote of confidence in the US economy, which is the world’s biggest and a crucial market for exporters in trade-reliant Asia.
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After the riskiest move of her career, US Federal Reserve Chair Janet Yellen has committed to a balancing act to keep her promise of gradual future interest rate increases.
ARNOLD: Many economists say they’d like to see stronger wage growth for more Americans.
Stocks closed up sharply higher. The bond market was more measured. Paris was up over 2% while London rose 1.19%. Also this morning, the Conference Board releases its index of indicators for November, while the weekly jobless claims and mortgage rate reports are expected from the Labor Department and Freddie Mac, respectively.
A dollar rise was by no means a foregone conclusion, not least because long-dated U.S. Treasury yields fell and history showed that the currency weakened once the Federal Reserve began its last three policy tightening cycles in 1994, 1999 and 2004. It’s been about a decade since the last time the Fed raised rates. The prime rate is a benchmark for some types of consumer loans such as home equity loans. Within minutes of the announcement, Wells Fargo announced it was hiking its prime lending rate to 3.5% from 3.25%.
Trading in Eurodollar contracts yesterday indicated investors expect the Federal Funds rate to still be below 1 per cent at the end of 2016, roughly half a per centage point below the median forecast of Fed policymakers. And the Fed’s first hike may not slow them.
“The important question is how far, how fast”, said economist Edwin Truman at the Peterson Institute for International Economics.
“We are confident that the actual pace of interest rate increases likely will be slower than that implied by the FOMC “dots”.
The impact on business and household borrowing costs is unclear.
“We’ve moved past whether you’re a supporter of what they did in terms of QE [quantitative easing] and zero rates”, Mr Doyle said.
“The Fed is much more uncertain itself about what is going on in the economy and willing to express that”, Calomiris said.
When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy.
Though all 10 voters on the Fed’s policy setting committee supported the initial hike, two registered a quiet protest of sorts by indicating in their forecasts that they felt the “appropriate” rate for the end of 2015 remained near zero.
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“Until something changes from what we know today about the likely path of interest rates, we don’t think there’s a whole lot more downside room for gold to trade lower on the perception of rates”, Katrina Lamb, the head of investment strategy and research at Bethesda, Maryland-based MV Financial overseeing $500 million, said in a telephone interview.
