The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs. The move would represent a major vote of confidence in the American economy’s recovery from the Great Recession, which caused the Fed to slash rates to zero for the first time ever.
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How much and how fast will the Fed likely raise rates further in coming months?
The Dow jumped 224 points, while the S&P 500 and the Nasdaq advanced about 1.5% apiece.
Ready, set, Fed: The Fed is due to announce its interest rate decision at 2 p.m. ET.
Some economists, including some inside the Fed, have opposed the move, arguing that the economy remains vulnerable to slower growth elsewhere in the world, and that there is no compelling reason like signs of inflation that would justify the move now.
The biggest loser right now against the dollar is the South African Rand, which along with jitters about the Fed, is still feeling the impact of South Africa’s president Jacob Zuma sacking two finance ministers in less than a week. “The U.S. economy has shown considerable strength”. The US government bond market has been pretty calm, but yields of so-called junk bonds – higher interest rate bonds sold by companies – have gone higher, and some bond funds, who manage investments by clients in these assets, are in trouble. While the Fed’s decision to increase the federal funds rate by 0.25% constitutes a noteworthy event, it should not deter investors from staying focused on achieving their long-term investing goals.
“It’s the most advertised Fed hike in history and the key is how they present it”, said Barra Sheridan, a rates trader at Bank of Montreal in London. Because of that, its effects are small – at first.
“The options market in the XLF in particular is looking for a bullish sentiment to come out of the Fed meeting, and that would likely be a rate hike here”, commented Stacey Gilbert, head of derivatives strategy at Susquehanna.
The rate change will affect banks, housing and even the automobile industry.
“I think as we increase interest rates, I would expect continued labor market improvement”. A sharp fall in oil prices has hammered energy shares, while a selloff in USA junk bonds has also weighed on markets. And the Fed’s first hike may not slow them. The yield on the 10-year Treasury note held steady at 2.27 percent. The dollar is up more than 0.8% against the Rand. After a terrific 2015, the USA dollar didn’t move much ahead of the Fed decision.
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The dollar meanwhile was slightly stronger at US$1.0928 to the euro and 121.86 yen. That’s a dramatic decline from $1.25 a year ago, but better than $1.06 just last month.
