In Asia, Japan may have the most to gain from the first USA interest rate hike since June 2006 because higher rates are likely to strengthen the dollar against the yen, facilitating Japanese exports.
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“The U.S. economy has shown considerable strength”, said Federal Reserve chair Janet Yellen. A year ago, for example, their projection for short-term rates at the end of 2016 was almost double what it is now.
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The bond market didn’t react much.
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“The real question isn’t whether the Fed should be raising interest rates or lowering interest rates; it’s whether the Fed is giving our economy sustainable interest rates”, said Rep. Jeb Hensarling (R., Texas). Consumers and businesses could now face modestly higher rates on some loans.
In the accompanying statement the United States central bank noted the further improvement in the labour market and that “under-utilisation of labour resources has diminished appreciably”. “If monetary policy remains accommodative, we’ve indicated that we will be watching what happens very carefully in the economy in terms of our actual, and forecast, our projected conditions relative to our employment and inflation goals”, said Yellen.
Analysts said some traders’ surprise that the Fed’s rate forecasts, or “dot plot”, did not come down to reflect a more dovish path of hikes into 2016 continued to support the dollar.
She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. But, a 0.25 per cent rate is not going to make dollar costly considering the enormity of funds available for investment.
The Federal Reserve’s rate hike could overprice the dollar and push oil prices even lower, while producing little benefit for the us economy, according to worldwide investor Jim Rogers. “The rates are still exceptionally low and monetary policy is still being set with a view to encourage growth, not rein growth in”.
There have been encouraging signs for the U.S. economy in recent months, with unemployment falling to 5% from a peak of 10% in 2009 and inflation beginning to creep up, with figures showing a bigger-than-expected rise in prices of 0.5% in the year to November.
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After initially rallying after Wednesday’s rate hike, the Dow plummeted 620 points in the final two days of the week. If rates stayed at near zero, the Fed might not have the tools to combat a recession.
