Major Banks Lifting Prime Lending Rate Following Fed Rate Hike

The bank sees USA growth picking up pace next year despite a slowdown in most other world economies, particularly China, and also stressed future rate hikes would be “gradual”, forecasting 100 basis points throughout 2016.

“The Federal Open Market Committee chose to raise the target range for the federal funds rate by one quarter percentage point bringing it to one quarter to one-half per cent”, US Federal Reserve Board Chairwoman Janet Yellen said. But nervous investors have been looking for further assurances.

Mauldin quotes his friend and ex-Dallas Fed economist Danielle DiMartino Booth as describing the rate lift as “teensy”, pointing out that the reduction of Treasury buying is the bigger issue.

Interest rates have remained low in order to stimulate economic recovery, and the Federal Reserve indicated that should the recovery falter, it would be willing to change its strategy. The real shock would have been if the Fed had not chose to raise rates after all. A year ago, for example, policymakers projected the Fed’s short-term rate would be much higher by the end of next year.

“When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession”, said Yellen.

Gold has slumped almost 10 per cent this year, largely on uncertainty around the timing of the rise and on fears that higher rates would hit demand for the non-interest-paying metal. If weakness in Asia infects the United States economy, then the Fed will suspend rate increases. But by staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history.

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. That is in line with the consensus view of economists. It cited “considerable improvement” in the job market.

This means that the range of rates U.S. banks offer to lend to each other overnight, called the the Federal Funds rate, is to be between 0.25% and 0.5%. However, the rise in the USA dollar will have the opposite effect because it improves the competitiveness of imports into the U.S. market.

The FOMC also raised the discount rate to 1% from 0.75%. The central bank’s interest rates are well below historical averages. The Fed is still promising that its next moves will be dependent on economic data.