Gold futures test six-year lows in wake of Fed rate hike

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” .

Additionally, the FOMC is continuing to reinvest and roll over expiring securities, keeping their balance sheet elevated and helping to keep interest rates low.

BoE Deputy Governor Minouche Shafik, said on Monday that there was less of a need for the BoE to act at the moment than the Fed, and that Britain’s record low 0.5 percent interest rate did not represent the lower bound. As long as the economy doesn’t go through any major hiccups, interest rates should keep rising over the next couple of years. That means an average rate will rise to about 16% from 15.77% now. “The domestic interest rates will be dependent on the inflation numbers”. Asked about the behaviour of the currency markets in the wake of the rate hike and how the government intends to tackle possible capital outflows, Mr Jaitley said: “Let’s watch for a few days”.

“We should be doing much better”.

According to the Federal Reserve the decision to move rates up is due to the economy being in good shape.

The central bank made clear the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target. In June 2004, the Fed embarked on the first of 17 rate hikes, staged in increments of 25 basis points (0.25%).

In view of the current low inflation pressures and the adverse effects of a strong dollar on the US economy, the futures market is predicting two or three Fed rate hikes in 2016.

So, if they are in no hurry to raise rates, this could prove to be bullish for the market.

“The central bank has been watching the Fed very closely and preparing the market for this”.

The Fed increased rates for the first time in almost a decade this week, confident the USA economy can stand higher borrowing costs after years of stimulus and near-zero rates.

You won’t see it mentioned in the Fed’s policy statements, but the political calendar looms large.

However, economists are anxious that future rate rises could come faster than the Fed now intends. It may have surprised them even more to see the 21% total return of that bond (price + coupon + currency return).

The US Fed move was widely expected.

Unlike other emerging market currencies, rupee has benefited from the rout in commodity prices.

After touching 1.021 per cent on Wednesday, a five-and-a-half-year high, yields on two-year notes were last at 0.9966 per cent. Yields on the benchmark 10-year Treasury notes fell to 2.2587 per cent, up 9/32 in price as investors turned their attention to timing of the next hike.

Low rates have forced banks to make do with smaller margins between the interest rate they offer depositors and the rates they charge consumers and businesses for loans.