But the Dow Jones Industrial Average was down more than 100 points in early trading in NY following its 224-point rally on Wednesday night. Thursday, however, the market was down.
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“There can be negative spillovers through capital flows, but remember, there are also positive spillovers from a strong U.S. economy”, Yellen said shortly after announcing the Fed’s first rate increase in over nine years.
Particularly for Millennials who are likely to hold substantial student loan debt, the situation is confusing as numbers and figures and exceptions are thrown around seemingly haphazardly. Additional rate hikes could support further strength in the dollar, and that causes headwinds for big USA multinational companies that sell their products overseas.
For Malaysia, the thinking is that with the difference between domestic and U.S. interest rates still having a nice cushion, the focus of Bank Negara will be on the Malaysian economy. “However, if the rate rises continue and become larger, the downside impact in advanced economies will be more serious”.
One of the most interesting pieces of information was that the decision was unanimous. Limiting surprises to markets helps preserve the credibility the Fed has painstakingly built up over the years, a goal that Fed Chairwoman Janet Yellen has stressed before. In the end, this was about the chair asserting her dominance over the committee. There is no inflation: and inflation expectations seem to be de-anchored and the economy is a long way from full employment. Core PCE inflation, which the Fed watches closely, is forecast around 1.5-1.7 percent through 2016 – similar to what Fed policymakers expect, but lower than the 2 percent target.
“Equities are all down and bond yields are down – partly because of stocks, partly because of lower oil, so the move is global”, said Ciaran O’Hagan, a strategist at Societe Generale. Auto-loan costs may rise as well, economists said, though not as fast as the short-term rate the Fed controls.
Considering the muted outlook for inflation and oil prices, a strong dollar hurting USA manufacturers, and the continued fragile state of the global economy, the Fed may have to be cautious with future rate hikes. For example, the Fed’s inflation target of 2 per cent is not a ceiling that inflation can not surpass.
This week’s move is small in nature, but it’s important for investors to recognize is that it is just the beginning.
Because there is often a gap between interest rates set by the central bank and what individuals pay on loans, the announcement is likely to leave many young debt-holders baffled and questioning what they are likely to experience in the coming years.
As we go into 2016, This growth dilemma will keep financial markets on edge.
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Gold has tumbled 11 percent this year as investors awaited the rate rise. Unemployment is still falling and the level of vacancies is the highest since at least 2001. Underemployment and those leaving the workforce: these measures gave not fallen at anything close to the rate that unemployment has. Despite nominal job growth, wage growth and labor-force participation rates continue to disappoint. If the economy slows, it can lower rates again. The next recession is overdue. Policy makers maintained projections, known as dots, for four rate increases next year, while emphasizing the gradual pace. Let’s hope it works out for them.
