How The Fed’s New Rates Will Affect Small-Town Americans

The Fed’s decision to raise rates had been widely expected and analysts said it indicated a degree of optimism for the world’s biggest economy.

With its decision on Wednesday to raise interest rates for the first time in nine years, the Fed fueled appetite for USA assets that’s drawing in demand for the dollar from overseas. Given strong liquidity in the Hong Kong dollar, the commercial banks can delay passing it on and that appears to be the case, especially with mortgage loans priced according to the prime lending rate.

On Wednesday, the US Federal Reserve hiked interest rates by 25 basis points, sending the metal sharply lower.

“We are going to run a higher-pressure economy for a while”, he said. “To keep the economy moving along the growth path it is on… we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly”.

The Fed’s projections, released with its statement, show it still anticipates a federal funds rate of 1.4% by the end of 2016, which implies four interest rate increases in 2016, or one per quarter. While the rate hikes are expected to be gradual and modest, beginning with 0.25 per cent rise, they will have profound consequences far beyond America’s borders. Silver firmed up after an overnight slump of 3 per cent, its biggest one day drop in almost three months, while platinum steadied after posting its sharpest slide in a year.

“The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook”. “We have never been in a predicament where a global recession began with rates already near zero”. What the Fed will have to watch is the manufacturing sector, which has been negatively affected by the dollar’s strength in overseas markets. We can expect to see borrowing costs go up. Essentially, this seems to suggest that the Fed is largely optimistic about America’s economic growth, with the central bank being confident that households can absorb the rise in interest rates.

Just seven of the 106 economists who gave end-year forecasts said rates would move higher than the Fed’s own dot plot, while only 2 of all the 22 primary dealers thought the FOMC dots were about right for the end-year fed funds rate.

With no evidence of inflation in wages or in consumer prices, there was simply no need at this time for the Fed to risk slowing the economy by raising rates.