On Tuesday and Wednesday, the Federal Reserve’s policy-setting committee – the FOMC – will meet, and it is expected to raise interest rates for the first time in nine years. We’ve had cheap money for so long, that if you said 5 percent mortgage rates to somebody they’d flip out. Developing nations’ central banks are pinning their hopes on a moderate rise to ensure the Fed does not make their task of keeping their own situation on an even keel insurmountable.
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The Fed remains the week’s star attraction, however, even if after 2-1/2 years of speculation about policy tightening and several false starts, most recently in September, its first, modest hike is unlikely to cause any major ripples.
Yellen told the congressional Joint Economic Committee Dec. 3 that the “gradual” pace of interest rate increases was linked to her assumption that the so-called neutral rate – which keeps supply and demand in balance in the economy – is low just now. Its economists forecast mortgage rates will rise gradually, ending 2016 at an average of 4.6 percent.
No matter what the Fed does this week, it is likely that uncertainty in the global economy will continue to put downward pressure on long-term rates.
“The Fed has spent this entire year telling us they are data dependent”, said Rajeev Dhawan, director of the economic forecasting center at Georgia State University in Atlanta. The bank’s shares are down more than 7 percent, according to the KBW Bank Index, which tracks share performance of 24 large USA lenders. Considering the key economic indicators-namely job growth, the economic growth rate, and inflation-there is a possibility that the Fed will announce a rate hike.
The prospect of higher borrowing costs has helped erase US$2.5 trillion (S$3.5 trillion) from global equities since Dec 1, and stock swings have widened.
He said he did see some interest in companies related to the consumer and residential U.S. housing market.
Importantly, the fed funds rate serves as a benchmark for interest rates around the world. It is estimated that around a third of traders have seen nothing but near-zero interest rates during their careers.
Kelly is ready for the rate hike, and he expects the markets are too.
This divergence has emerged as the Fed moved away from stimulating policies just as central banks in Europe, Japan and elsewhere maintained or even doubled down on such measures.
“Rates are pretty low and they’re not going to change much”, in the short term, says Dean Croushore, a University of Richmond professor and former Fed economist. Median projection says, FED will hike rates by 75 basis points in 2016 and 100 basis points in 2017.
Once the Fed’s stimulus program ended, hundreds of billions of dollars flowed out of emerging markets and back to the US.
“The Fed has said at some point after they increase short-term rates they are going to begin to allow that portfolio to shrink, and they may more actively sell some of those securities”, Fratantoni said. You’ve got illiquid market conditions at this time of year.
“I don’t think the Fed will be overwhelmed by things like fund redemptions”, said Mr Kelvin Tay, regional chief investment officer at UBS Group AG’s wealth management business in Singapore.
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Hasenstab said stronger economic fundamentals should make countries like South Korea, Mexico and Malaysia resilient but that weaker Turkey and South Africa, both of which have hefty current account deficits, could be more negatively affected.
