“For bonds to underperform a cash investment, rates do not simply need to rise-they need to rise faster than the market expects”.
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The move was widely expected.
The Fed has been unusually patient in nurturing this economic recovery, with interest rates held near zero.
“Federal Reserve chair Janet Yellen said the move “[recognized] the considerable progress that has been made towards restoring jobs, raising incomes, and easing the economic hardship of millions of Americans”, since her predecessor Ben Bernanke slashed rates to nearly zero at the height of the financial crisis in 2008 meant to stimulate economic growth.
A stronger US currency makes gold more expensive for foreign holders.
Investors saw the market reaction as justified, given the Fed’s dovish approach to future rate increases.
With the Fed’s much anticipated first rate hike out of the way, the focus now shifts to the pace of future rate increases.
West Texas Intermediate (WTI), the USA benchmark, had been trading near $36/bbl, down $1.35 from Tuesday’s close, prior to the announcement of the Federal Reserve. “The Committee is confident that the economy will continue to strengthen, the economic recovery has clearly come a long way although it is not yet complete”.
It reached just 0.25% during the 12 months that ended in October.
“The Fed’s move was pretty much priced in by markets ahead of time”, wrote Julian Jessop, an economist with Capital Economics in a note on Wednesday. They expect consumer prices to rise 1.0 percent next year, down from 1.2 percent projected earlier. The unemployment rate will further fall to 4.7 percent in 2016, lower than their September forecast of 4.8 percent.
More importantly, the inflation is expected to rise to 2 percent over the medium term which is and indication of growing demand in the market.
The Federal Reserve has a dual mandate of fostering maximum employment and keeping inflation under control, and the federal-funds rate is one tool the central bank uses to fulfil that mandate.
Fed chairperson Janet Yellen has managed the path towards monetary policy normalisation quite smoothly.
The next big decision for the Fed, likely after a few more rate increases, will be when and how far to go in shrinking its portfolio of Treasury and mortgage assets, either by allowing them to run off naturally or by selling outright, a less likely option.
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“Otherwise, India is well adjusted (to deal with impact of Fed rate hike) and has fortified its position over the recent years”, Chauhan said.
