The Fed coupled its first rate hike in nine years with a signal that further increases are likely to be made slowly as the economy strengthens further and inflation rises from undesirably low levels.
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Inflation is still below the Fed’s 2 per cent goal but officials believe it will rise in 2016 as slack in the job market diminishes and oil prices stabilise. Also with a small part of India’s sovereign debt being held by foreigners or denominated in foreign currency, chances of rupee emerging a gainer in the near-term are high.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”, it said. He, however, added that there are certain firms for which the hike would be painful.
In other economic reports, it was reported today that fewer Americans applied for unemployment benefits which is a clear indication of the strength of the current labour market.
The cheer with which the financial markets greeted the Fed’s rate increase – or rather the cautious comments accompanying it about the pace of future increases – ran out of steam quickly enough. Countries right now are witnessing benefits of sliding oil prices, but once prices stiffen, markets will likely gyrate, spreading unease. The FOMC policymakers clarified that they will continue to monitor inflation closely and will give it due consideration for future rate increases.
The kiwi was little changed at 82.31 yen from 82.40 yen yesterday ahead of the Bank of Japan’s policy review which is expected to keep interest rates near zero, and affirm its quantitative easing programme. “What that means is that for any given monetary policy, interest rates are still going to be lower than they would have been 10 or 15 years ago”.
In a sign that the era of cheap money is coming to an end, the Federal Reserve raised rates from between zero and 0.25 per cent to between 0.25 per cent and 0.5 per cent.
The long-expected but modest increase in the federal funds rate also boosted the dollar to a fresh two-week high against a basket of major currencies, while Wall Street snapped a three-day rally.
Interest rates futures implied traders see the Fed hiking rates by mid-2016, followed by another in late 2016, according to CME Group’s FedWatch program. The last move in the primary credit rate was more than 5 years ago in February 2010 when it was raised to 0.75% from 0.50%.
“The interest rate impact on the typical household from a quarter percentage point move is nearly inconsequential”, he said. Less than six months ago, the Governor was hinting that United Kingdom interest rates could rise around the turn of the year – about now.
Given all that, now imagine how markets might have freaked out if the Fed had chosen not to take this tiny step toward normalization.
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The Dow Jones industrial average .DJI fell 252.98 points, or 1.43 percent, to 17,496.11, the S&P 500 .SPX lost 31.16 points, or 1.5 percent, to 2,041.91 and the Nasdaq Composite .IXIC dropped 68.58 points, or 1.35 percent, to 5,002.55.
