Asia Reacts Positively to Fed Interest Rate Hike

US Federal Reserve chair Janet Yellen cautioned Americans not to “overblow” the Federal Reserve’s move on 16 December to raise US interest rates a quarter of a point, saying the increase reflects confidence in the US economy.

Chauhan said it looks like the Fed would hike rates slowly over a long period and what remains to be seen is how thosehikes carry out and how the carry trades kind of get unwound in that case.

“While there is a drag from net exports, from relatively weak growth overseas and the appreciation of the dollar, overall, we decided today that the risks to the outlook for the labour market and the economy are balanced”, she said.

The RBA last lifted rates in November 2010, while its most recent cut was in May this year.

But the economy is now a lot healthier with unemployment at 5 percent, half of the 10 percent rate it hit in 2009 during the worst of the jobs crisis.

Marked as a history move, the rate hike marks the exit of the zero interest rate policy, which had been into place in the wake of the financial crisis of 2008. The Fed’s signal that rate rises over the coming months will be gradual also helped soothe concerns.

Monetary Policy is the process by which monetary authority or the central bank of a country controls the supply of money in the economy.

This is a good indicator that the US economy is growing at a sustained rate and projected growth by the US Central bank for next year increased slightly from 2.3% to 2.4%. with increased household spending and investment by business. “The rate rise may finally clear the deck and remove rate-related uncertainty from the bullion market”.

European stock markets also saw gains.

Then there are, of course, there are the forecasters who doubt economic data will justify another rate hike at all this economic cycle.

Yields on U.S. Treasuries rose, while the dollar was largely unchanged against a basket of currencies.

Given that labor market conditions have improved sufficiently, the pace of future Fed rate hikes will be determined by changes in inflation.

As Yellen said, “The economic recovery has clearly come a long way”.

The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. This time around: Inflation is only 0.5%, and when you strip out food and energy prices, it’s only 2%, or about where the Fed wants it.