The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
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Federal Reserve policymakers have slightly lowered their projections for short-term interest rates over the next three years, a sign that policymakers may move slowly after their first rate increase in seven years.
India Inc Thursday said the rate hike by the US Federal Reserve will not have a significant impact on India even though it may put pressure on emerging market currencies, including the rupee. We think the U.S. economy will clear the bar, and continue to expect four more rate increases in 2016, starting with the March 15-16 FOMC meeting.
That is in line with the consensus view of economists that the Fed’s target for the federal funds rate – the rate that banks charge on overnight loans – will end next year at around 1 per cent. “Global shares are likely to resume their rising trend but with USA shares as a relative underperformer”.
When Reuters last polled primary dealers, the median forecast was for a fed funds rate of 1.125% at the end of that year.
On the other hand, former RBI Governor C Rangarajan, who is in Hyderabad, points out that the country may see some capital outflow besides weakness in stock markets.
Currency markets also reacted, with the US dollar surging in the hours following the rate announcement.
The Fed said the rise was part of a “gradual” process to get rates back to normal after years of being near zero.
The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans. But the central bank has tested other tools to help it achieve the increases it wants in the funds rate.
“Overall, taking into account domestic and global developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced”, the Fed said. Those rates are tied to banks’ prime rate, which responds quickly to the Fed’s changes.
“It doesn’t signal that higher Australian interest rates are on the way though”, Mr Oliver said.
The UK interest rate has now remained at 5 per cent for more than six years and a rise is now not predicted until well into 2016.
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With the much anticipated first rate hike out of the way, the focus now shifts to the pace of future rate increases.
