The U.S. central bank on Wednesday raised the Federal Funds Rate by a quarter percentage point, the first such increase in almost a decade.
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“It’s already had an impact on commodity markets, we’ve all known that interest rates would be going higher”, he said. Republication or redistribution of content provided by EconoTimes is expressly prohibited without the prior written consent of EconoTimes, except for personal and non-commercial use.
If the Fed did not move and “begin to slightly reduce” the amount of stimulus the U.S. economy was getting, the risk would be that the economy would overshoot and force the fed “to tighten policy abruptly”, Yellen said at her press conference, adding: “It’s about a long running and sustainable expansion”.
On Wall Street, the Dow.DJI ended Wednesday with gains of 1.28 percent, while the S&P 500.SPX rose 1.45 percent and the Nasdaq.IXIC 1.52 percent.
But the Yellen Fed is explicitly holding out the possibility of slowing that down if inflation doesn’t pick up.
Elsewhere, the Norwegian crown surged more than 1 percent against the euro after Norway’s central bank declined to cut interest rates further despite a slide in oil prices that is dampening growth.
Indian policymakers, including Reserve Bank of India Governor Raghuram Rajan, have been touting the South Asian nation as being more insulated to Fed-related volatility than other emerging markets due to its better economic fundamentals.
Within Asia, Japan may have the most to gain from the Fed’s shift, since higher USA interest rates are likely to push the dollar up against the yen, helping Japan’s exports.
Clear communication has not been a strong suit at the US central bank in recent months, with top Fed officials talking at cross purposes and sending mixed signals about when the benchmark interest rate should rise.
The Federal Reserve’s rate hike could overprice the dollar and push oil prices even lower, while producing little benefit for the USA economy, according to worldwide investor Jim Rogers.
Japan’s Nikkei Stock Average closed up 1.6% and the Shanghai Composite rose 1.8%. That rate had been near zero for seven years to foster an economic recovery after the USA mortgage crisis that sparked a global recession. At the same time investors were encouraged that Fed emphasized that further increases will be gradual.
He told the Financial Times ahead of the Fed’s decision that Britain still faced a “low for long” scenario, insisting the economic conditions for a rise in the United Kingdom were still not in place.
The Fed will keep an eye on how the economy is doing before any future rate increases. “Most issuers are still trying to get things done at around the same levels before the rate increase”.
“The currencies of many of these emerging economies have been under significant pressure in this period and that looks set to continue”, says Woodford.
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But, in a small surprise, the FOMC support for the rate decision was unanimous, and the committee’s statement pointed to “considerable” improvement in the past year in the labor market, and said it is “reasonably confident that inflation will rise, over the medium term, to its two percent objective”.
