How Fed rate hikes will affect PH, emerging markets

The Federal Reserve on Wednesday announced it voted 9-to-1 to raise its benchmark rate known as the federal-funds rate by 0.25% to a range of 0.75% to 1%.

A central bank gets behind the curve when it is not raising interest rates at a pace fast enough to keep up with inflation.

The median estimate of the long-run interest rate, where monetary policy would be judged as having a neutral effect on the economy, held steady at 3.0%.

Meantime, the core price index for personal consumption expenditure (PCE), the Fed’s preferred indicator for gauging core inflation excluding food and energy, increased 1.7 percent in January from a year ago, moving toward the central bank’s target of 2 percent.

The Fed is all-but-certain to hike short-term rates once again – by a quarter of a percentage point after its two-meeting ends Wednesday afternoon. Fed officials hinted that it will hike interest rates two more times this year, as it had previously anticipated.

“While it is hard to predict the future, it is reasonable that the Fed will continue to increase short term rates throughout 2018, if the economy continues to remain strong and there is an infrastructure plan enacted”, Wasserman said. Thus the market is relatively indifferent as to whether the Fed raises rates or not. Despite months of job gains, the unemployment rate remains relatively unchanged, which could signal that workers are waiting to enter the labor force. The Board voted unanimously to “raise the interest rate paid on required and excess reserve balances to 0.75 percent”, a decision that took effect december 15, 2016. The last rate hike came in December. The yield on 10-year Treasury securities, which influence mortgage rates, has jumped to 2.6%, up from 2.3% in February and 1.8% last November.

“Today’s decision. does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy”, she noted in her first post-policymaking press conference since Trump took office. But this doesn’t mean the Fed no longer matters, just that they are no longer the destabilizing force that they were during the 2008-15 period. The dollar has been struggling to head to higher highs despite a full market pricing (almost) of a hike in March and three this year.