Fed rate hike won’t force RBA’s hand, says economist

“There can be negative spillovers through capital flows, but remember, there are also positive spillovers from a strong USA economy”, Yellen said shortly after announcing the Fed’s first rate increase in over nine years.

As we’ve written before, by “raising interest rates” the Fed means it is actually moving two rates higher – a lower-band (0.25%) which is its floor for reverse repo operations, and an upper-band (0.50%) which is pays on excess reserves parked at the Fed.

“I think this move has been expected and well-communicated, at least I hope that it has”.

That the road ahead could still be anything but smooth and straight for both the global economy and the emerging markets is also amply evident in the language contained in the Fed’s communication.

The central bank believes the United States economy was strong now and no longer needed crutches.

The Federal Reserve finally raised interest rates. “The economic recovery has clearly come a long way”.

Fresh forecasts from the Fed suggest most policymakers are looking for four rate hikes next year, and Williams said his own view is in line with that expectation.

“Defining “gradual” and divining how the FOMC will implement a gradual rate increase will become the new parlor game for financial markets and monetary policy wonks”, William Lee, head of North American Economics at Citi, wrote in a note.

“The process is likely to proceed gradually”, Yellen said, a hint that further hikes will be slow in coming.

And apparently, they expect the pace of rising rates to be even more “gradual” than the Fed does.

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%.

The European Central Bank had cut its deposit interest rate further, …to minus zero.three percent in early December, … prior to the U.S. Fed’s decision to boost rates.

On Wednesday, the Fed’s committee improved its economic outlook. She emphasised that interest rates remained low even after the rate hike, near levels economists regard as appropriate for a recession. These are tools it used after the financial crisis to ease monetary policy when rates were already near zero. “The US economy has shown considerable strength”.

Additionally, the ability of domestic agencies, such as the Employees Provident Fund, to provide funding in the event of a sell-off by non-residents, is expected to continue to support the sovereign’s domestic funding needs.

The most hawkish prediction in the poll is that rates would reach 1.75-2.00 percent by the end of next year and the most dovish said the Fed will not hike rates again at all in 2016. Included in the statement, Fed officials offered predictions that the rate banks charge on overnight loans, the federal funds rate, would end 2016 just over 1 percent.

Fed chief Janet Yellen confident in health of the USA economy, playing down concerns that it would be knocked off course by weakness overseas.