“We expect no shrinkage of the Fed’s balance sheet until after the first few rate hikes”.
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The U.S. central bank ended its seven year near-zero rate policy on Wednesday and achieved its higher target rate range of 0.25-0.50 percent without relying heavily on its reverse repurchase agreement program to keep rates from sagging toward zero, analysts said.
Memories are fresh of the period between 2004 and 2006 when the Fed raised rates 17 times in a row after barely moving in the previous years even as the housing bubble ballooned.
The Fed’s tightening policy fuels demand for higher-yielding USA debt compared to bonds in Europe and Japan, driving investment flows into the United States and boosting the dollar. The continued drop in oil prices rekindled worries on corporate profits on energy companies and disflationary pressure worldwide.
Next year, he said, non-performing loans (NPL) will rise across the board and especially in the commodity trading, oil and gas, and property sectors, offsetting net interest income gains by banks from higher rates.
“The Fed is going out of its way to assure markets that, by embarking on a “gradual” path, this will not be your traditional interest rate cycle”, said Mohamed El-Erian, chief economic advisor at Allianz. “The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook”.
In a Reuters poll released on Friday, 77 of 120 economists forecast another rate increase from the Fed in the first quarter of 2016, mostly likely in March.
The conditions were ripe for the Fed to raise rates. And the unanimous Fed statement said as much. Wells Fargo was the first bank to announce the rate hike.
Rates on savings accounts and certificates of deposit accounts are likely to improve, allowing consumers to generate more interest on the cash they’ve parked at the bank.
Just seven of the 106 economists who gave end-year forecasts said rates would move higher than the Fed’s own dot plot, while only 2 of all the 22 primary dealers thought the FOMC dots were about right for the end-year fed funds rate.
The rates that most people pay for mortgages, auto loans or college tuition aren’t expected to jump anytime soon. It means the Fed thinks the USA economy, which remains in a long but sluggish recovery, is strong enough to handle progressively higher lending costs.
For savers, Roberts said, the rate hike will be beneficial – but only slightly so.
For months, Yellen and other Fed officials have said they expected any rate hikes to be small and gradual.
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Goldman Sachs Group Inc. tracks that sort of thing with its Financial Conditions Index, a measure that incorporates variables like stock prices, credit spreads, interest rates and the exchange rate. The dollar, which has already strengthened 25 percent over the last two years, could rise further. It was gold’s worst day in almost two months.
