Economists and other market watchers expect the Federal Reserve to show its confidence in the strength of the US economy today by ratcheting up its benchmark short-term interest rate for the first time since 2006.
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The Fed’s hope is to engineer a gentle rate hike that prevents mass sell offs in share or bond markets, which would send bond yields higher, Richard Clarida, global strategic adviser at PIMCO says.
Fed chief Yellen has tried to reassure Wall Street that the central bank will raise interest rates ever so slowly and carefully, but she has acknowledged that there could be increased volatility in financial markets as the central bank starts making its moves. That’s because the central bank thinks the aftereffects of the financial crisis have made the economy susceptible to slowing down at interest rates above 2 percent, instead of the previous 4 percent. “Don’t let a single decision by the Fed drive your investment portfolio in the short run, irrespective of what the market reaction is”, Hinds said. However, the Fed is more concerned about the potential for inflation to pick up rapidly when it does start to rise and would rather manage this early with small gradual hikes, than have to tackle it head on more aggressively a year or so down the line.
Dow e-minis were up 103 points, or 0.59 percent, with 29,609 contracts changing hands at 8:25 a.m. ET. Or is it the stubborn lack of inflation in the US economy?
The euro was buying $1.09, the dollar fetched 121.91 yen and Britain’s sterling hovered just above $1.50. This could lead to higher borrowing costs for home buyers, but it’s not guaranteed.
Tara Sinclair, a professor at George Washington University and chief economist at the jobs site Indeed, says hiring in both industries would likely be influenced by how quickly the Fed raises rates over the next year.
“The gold market is devoid of any funds coming in from gold-backed exchange-traded funds and jewellery demand remains fairly soft”, said INTL FCStone analyst Edward Meir.
But now even critics admit the Fed’s strategy pulled the world’s biggest economy back from the brink.
The Fed is expected to move gradually on subsequent rate hikes after the initial liftoff, according to a Reuters poll. That has removed some of the uncertainty that investors dislike.
In arguing that it is time for a rate increase, Gagnon pointed out that employment growth has been steady throughout the year, but Ubide said without a pickup in inflation the Fed could hold off on raising rates.
Japan’s benchmark Nikkei 225 index jumped 2.4 percent to 19,009.19 and South Korea’s Kospi climbed 2 percent to 1,972.45. It would be the first rate hike in nine years.
Hong Kong’s Hang Seng advanced 2.3 percent and the Shanghai Composite Index in mainland China rose 0.7 percent.
“It is a foregone conclusion that the Fed is going to raise rates”, said Kully Samra, a managing director at USA focused investment manager Charles Schwab in London.
Fed officials wrap up their December meeting on Wednesday.
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Fed chair Janet Yellen has said that waiting too long to raise rates could force the Fed to “tighten policy relatively abruptly” and risk “disrupting financial markets and perhaps even inadvertently push the economy into recession”. If that does indeed happen, the federal funds rate – the rate banks charge each other for overnight loans – will tick up a quarter-percentage-point from near zero.
