The Federal Reserves move to hike interest rates by 25 basis points, only the third hike in over 10 years and second in 3 months, marks the beginning of a new phase of United States monetary policy normalisation, says Fitch Ratings.
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The raise has been widely expected as Fed officials have made a series of comments strongly hinting at a hike in recent weeks.
The market now expects the Fed to hike the rate two more times this year, in line with the bank’s projections from December 2016.
Average rates for 30-year mortgages rose this week to 4.29 percent, the highest level since January 2014, according to the Mortgage Bankers of America.
The increase – 25 basis points to a range of 0.75%-1% – is based on the committee’s belief that the economy is recovering, the labor market is improving and inflation will increase. The rates at which banks can borrow money trickles out to consumer loans as well, and if the bank’s fees go up, they’ll raise their rates as well. But in the wake of the Fed’s third interest rate hike in a decade, markets are pricing in weaker odds of a Reserve Bank of Australia rate hike this year. “In an unusual bullish move for the non-yielding safe haven asset after a rate hike, this can be entirely attributed to the aforementioned Dollars weakness”, said analysts at Accendo Markets in a note.
Although many expected the Fed to be even more aggressive, there is little doubt that more hikes are on the way. Over the past two years Fed policymakers had anxious that a weak global economy would limit US growth and hold down inflation, leaving no compelling reason to raise rates.
Fed Chair Janet Yellen said the committee judged that a “modest increase” in the rate is appropriate “in light of the economy’s solid progress”. “The three-month Sibor and Sor are likely to return to the rates we saw early previous year”. External account burden is getting heavier by the day and if there is an unexpected increase in interest rates from other developed countries then it would be very hard to stop capital outflow.
All of which has sent the Aussie 1.7 percent higher since Monday and if sustained, it would be the first such gain after five weeks of losses.
Normally, investors expect such moves to hit rate-sensitive and dividend-paying sectors like utility and real estate but push up bond yields and financial ETFs – a rising rate beneficiary.
Stocks soared today after the Federal Reserve hiked interest rates today-as expected-but took a less hawkish tone than some had expected.
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– Instead, the Fed will need to convince markets that interest rates will be moving higher and faster than previously anticipated – a tall task. Unemployment is falling, wage growth is nearly 3 per cent (around 50 per cent higher than Australia), inflation is picking up and consumers are more confident.
