In a long-expected move, the Federal Reserve Wednesday raised its main interest rate by a quarter of a percentage point, pushing it up from near zero where it has been for seven years. Unemployment has fallen to 5 per cent and inflation is getting close to 2 per cent.
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Conversely, an increasingly strong dollar will make it even more favorable to overseas manufacturers who are seeking to sell their boats in the relatively robust US market, something that USA builders have already noted. Core inflation is expected to fall between 1.5% and 1.7%, compared with 1.7-2% a year ago.
But the recovery from the worst economic downturn since the 1930s has been a long haul.
Not surprisingly, the Fed now also finds itself at odds with the rest of the world, with many nations falling into recession and their central banks cutting rates. With the Australian economy on a weaker trajectory relative to its potential than the USA economy, the RBA will not be following the Fed into a rate hike.
Wall Street led global equity markets lower yesterday, a day after the US Federal Reserve’s first interest rate hike in almost a decade, as continued pressure on oil weighed on energy-related stocks. This suggests that they expect four hikes next year, each by 0.25%. That’s right, and maybe it’s why former Fed chief Ben Bernanke said last week interest rates might have to go negative in the future. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”, it said. “A strong economy is good for sales of boats and recreational boating products and services”. But when it mattered the 69-year old economist guided markets to a soft landing and convinced skeptical rate setters to back the consensus.
“The direct effect on US GDP growth is generally larger, but offset to some extent by the rise in the dollar so the overall effect on exports and global GDP growth rates outside the US will be small but observable”. Tells us where the direction of the economy is going.
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Yellen indicated loans with long-term interest rates will likely to remain stable, but credit card rates could see a slight increase, adding that it shouldn’t have a dramatic effect in the near future.
