If Fed keeps hiking rates, stock rally could sputter next year

The bond market didn’t react much.

“But as the Fed undertakes more albeit gradual rate hikes next year, the RBA retains an easing bias and commodity prices remain weak the trend in the Australian dollar is likely to remain down with it heading to around $US0.60 sometime in the next 12 months”, he said.

Commodity prices came under pressure once again as analysts warned that a sustained rise in the dollar would make raw materials from oil to copper more expensive in other currencies.

THE QUOTE: “If Fed Chair Janet Yellen was ever to pull a rabbit out of the hat, now was the time to do it and she succeeded magnificently”, said Michael Ingram, market strategist at BGC Partners. The Fed is well aware and wants to ensure the rate hikes are absorbed before sucking out liquidity from the system and thus, it maintained status quo on its holdings in treasury and mortgage-backed securities.

Memories are fresh of the period between 2004 and 2006 when the Fed raised rates 17 times in a row after barely moving in the previous years even as the housing bubble ballooned.

“The Fed’s action brings an end to the lift-off uncertainty”, said Amando Tetangco, the governor of the Philippine central bank, which left interest rates on hold at a monetary policy meeting on Thursday, reported Reuters. Though all 10 voters on the Fed’s policy setting committee supported the initial hike, two registered a quiet protest of sorts by indicating in their forecasts that they felt the “appropriate” rate for the end of 2015 remained near zero. Evidently, the Fed believes that the economy is strong enough to withstand a return to a more normal rate environment.

Still, the Fed’s move to lift its key rate by a quarter-percentage point will raise short-term borrowing costs for banks. “Given ongoing deflationary risks and slow global growth, future Fed hikes are likely to be cautious and gradual”, he said a report.

While the Fed’s first hike (in a decade) was on expected lines, there is no certainty about when and how it will move with respect to subsequent hikes. They still need savers’ funds and are actively competing, and as a result, they’re offering far better rates than their better-known counterparts.

“We’ve anxious about the fact that with interest rates at zero, we have less scope to respond to negative shocks”, she said at her news conference.

The Fed’s long-awaited and long-expected interest rate increase will have some affect on consumers, but consumers looking to buy homes or cars shouldn’t worry too much for now.

Steven Szakaly, chief economist for the National Automobile Dealers Association, says dealers will press financing companies to keep loan rates low. Should the economy stumble, the Fed could postpone further rate increases.

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7% next year from the current 5% and economic growth at 2.4%.

“Policy remains accommodative”, Yellen said.