The dollar is slightly weaker ahead of the Federal Reserve. But that was widely expected and long. By market close, the three indexes had mostly recovered from the initial plunge, something Tom Girard, senior managing director and head of fixed income at mutual life insurance company New York Life, called a “knee-jerk reaction”. They reaffirmed the continued improvement in the labor market. Over the same period, the S&P 500 (GSPC) dropped 18.28 points, or 0.8 percent, closing at 2,252.45, and the Nasdaq Composite index (IXIC) fell by 35.96 points, or almost 0.7 percent, before closing at 5,435.82. The Standard & Poor’s 500 index fell 18.44 points, or 0.8 percent, to 2,253.28, its biggest percentage loss since mid-October.
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All 120 economists in a recent Reuters poll had expected a rate hike on Wednesday.
Bond prices fell after the announcement Wednesday, sending bond yields higher. When the economy is slow, the Fed lowers rates, which cuts the costs of consumer borrowing on cars and homes and stimulates corporate investment. Higher bond yields make those stocks less attractive to investors seeking income. Goldman Sachs gained 0.5 percent.
Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.
The slight upward adjustment of forecast reflected Fed officials’ consideration of the falling unemployment rate, Yellen said. The HKMA’s chief executive, Norman Chan, said local currency interest rates will continue to track movements in the USA and “the rising trend is expected to continue to be affected by the scale of outflows from the Hong Kong dollar, worldwide developments and other factors”.
“I’m not going to offer the incoming president advice about how to conduct himself in policy”, Yellen said. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. “All the FOMC participants recognise that there is considerable uncertainty about how economic policy may change and what effect they may have on the economy”. Financial futures market bets now predict the Fed will bump up rates twice in 2017.
Overall, the Fed’s policy statement showed modest changes in wording from the previous meeting.
US GDP growth: According to FOMC document, the committee sees the media forecast of gross domestic product growing 2.1 percent in 2017, 2 per cent in 2018 and 1.9 per cent in 2019.
With a low unemployment rate and signs of growth among workers’ wages, Fed Chair Janet Yellen said, the central bank expects to raise rates three more times in 2017. All else equal, Fed rate hikes would be working in opposition to those goals. Considering that the 10 year expectation is at the Fed’s desired 2 percent I’m not sure why they still think that is low. They see the rate between 2.75 and 3 percent by the end of 2019.
“They didn’t mention the fiscal stimulus but typically their aggressiveness does indicate that there’s a little more confidence that they can get away with three hikes next year”, said Aaron Kohli, interest rate strategist at BMO Capital Markets.
FED’S MOVE: The hike took the Fed’s key short-term rate to a range of 0.50 percent to 0.75 percent.
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This time past year, policymakers flagged four interest rate rises for 2016, depending on global events, and ended up delivering just one.
