The decision to deliver monetary policy tightening at a time of below trend global growth, subdued inflationary pressures, monetary policy easing elsewhere and a strengthening USA dollar has many questioning whether the Fed will succeed in lifting interest rates by a further 1% in the year ahead as their economic projections now suggest.
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Greg McBride, chief financial analyst at Bankrate.com, calculates that for a $25,000, five-year auto loan, a one-quarter percentage point increase would boost monthly payments by precisely $3.
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The reaction, based on history, is understandable.
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The Federal Reserve on Wednesday night made a decision to hike the rate by 25 basis points after keeping them at near zero levels for a prolonged period – its first hike since 2006.
The financial sector (XLF) has been gaining lately in anticipation of the rate hike.
“A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year”, said the December 16 statement released by the FOMC (Federal Open Market Committee). Wells Fargo was the first bank to announce the rate hike. Bond yields and prices move in opposite directions.
Economic affairs secretary Shaktikanta Das said the Fed’s “accommodative” monetary stance is actually good for the emerging market economies and India does not expect any large selling by foreign funds. As a result of worries on central banks reducing gold bullion reserves, in August 1999, gold fell to an all-time low of 252 dollars, about 70 percent lower from the previous peak.
YELLEN: We would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective.
The outcome, we believe, is likely to be somewhere in between.
It’s worth looking at all the hawkish arguments that have failed to sway the Fed during the seven years since the financial crisis. To justify higher rates, the Fed will need to see stronger economic growth and a rise in the inflation rate, which is below the Fed’s target of 2 percent.
However, inflation in the U.S. is not just determined by domestic demand. “They are saying, ‘We are now comfortable with the fact that our economy is growing strongly enough that we can tolerate a rise in interest rates.’ That is the message, and that’s why people pay so much attention to it”.
It could take years to find that out as the Fed treads a path to higher rates, with markets expecting an even slower pace of rate hikes than the Fed itself foresees. The US is not a closed economy.
“We are well aware that the film, The Great Escape, didn’t end particularly well”. Another way the Fed is continuing to treat investors, consumers and borrowers gently is by making the non-ironclad promise that rates should go up modestly over time.
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If your credit card has a variable rate – averaging around 15 percent today – your rate could rise in the next few months. The move is meant to signal that interest rates in the United States will eventually return to normal.
