Should one worry about the Fed’s rate hikes?

The Federal Reserve raised interest rates last week by a quarter of a point. This is the second increase since 2008, with the other one occurring at the end of 2015.

LONDON, Dec 20 (Reuters) – The dollar bounced back towards 14-year highs on Tuesday, boosted by upbeat comments by the chair of the Federal Reserve that kept alive market expectations for a faster pace of USA interest rate hikes next year than had previously been forecast.

Yellen noted a Fed study released earlier Monday found that young workers are more optimistic about the job market.

About 2.25 million net new jobs were created over the past 12 months. Defaults have historically been lower for loans than high yield bonds, with recovery rates higher. In fact, based on their projections, not only are we going to see three rate hikes next year, but another three each in 2018 and 2019. In short, the Fed believed that it had met or was close to reaching its goals of full employment and price stability of 2% inflation. Let’s face it, bonds, being the more defensive asset classes around, have had their fair share of gains over the past 30-years but signals that this multi decade bond rally could be a some point of inflexion are beginning to emerge, across both sides of the Atlantic. Core inflation is at 1.75 percent (core inflation excludes energy and food prices).

Except for the mining and oil index which inched up almost 1 percent, all other sectoral indices ended in the red, led by property which declined 3.6 percent, industrial which went down 3.4 percent and services which closed lower by 2.6 percent.

The question remains: Will excessive interest rate hikes in the USA have a profound negative effect on the rand exchange rate, share and bond markets and the inflation rate? This slows the rise in prices.

Judging by this and the decade prior where the Fed continually said it would raise rates but didn’t, the Fed has clearly become a reactive force to whatever the stock market is doing.

The current narrative is that President-elect Trump will push through corporate tax cuts that will spur business investment and increase the demand for (and cost of) labour, and that he will also introduce massive new infrastructure-spending initiatives. “The good news is that the vast majority of student borrowers who complete their degrees find work that allows them to keep up with their payments and pay off their loans”.

Although the December hike was expected, markets have been roiled by the expectation that the central bank will accelerate the process next year if inflation levels perk up once again. The Fed projected that three rate hikes in 2017 were likely, up from two increases that were projected in September.