Stocks Rally After Fed Hikes Rates

It has probably been the most long awaited quarter of a point interest rate rise in history, but the US Federal Reserve (Fed) has finally pulled the trigger by increasing the target range for the Fed funds rate by 0.25 per cent to 0.5 per cent. “There are pressures on some sectors of the economy, particularly manufacturing, and the energy sector…but the underlying health of the US economy I consider to be quite sound”.

Worldwide investors have already yanked billions out of markets in Asia, South America and Russian Federation over the past year, and the fear is that the rate hike will trigger even more massive fund outflows – a concern Dr Yellen addressed on Wednesday.

THE QUOTE: “If Fed Chair Janet Yellen was ever to pull a rabbit out of the hat, now was the time to do it and she succeeded magnificently”, said Michael Ingram, market strategist at BGC Partners.

Ahead of the Fed’s decision, the Wall Street Journal naively reported that “a shift to higher rates is expected to hurt gold, which doesn’t pay interest and costs money to hold”.

That’s because the exchange-rate more than offsets the decline, as imported gas is priced in USA dollars. The median projected federal funds rate for 2016 remains at 1.4%, suggesting four rate hikes next year, each by 0.25%.

The FOMC (Federal Open Market Committee) met this week to decide the course of short-term interest rates.

“My forecast for raising rates is very similar to what the Fed has forecasted”, said Girard. This is not a threat to expansion. “But once the global economy settles down with the rate change impacts, our exports, I think, will pick up considerably”.

The move sent the dollar to a two-week high on Thursday against a basket of major currencies.

Wednesday’s widely expected move by the United States central bank signalled that the world’s number-one economy is in rude health. Less than 24 hours after the announcement, global markets maintained a calm temperament, according to a number of prominent analysts providing the Fed with the ideal reaction it had hoped for.

Though the U.S. dollar gained initially, several emerging markets witnessed controlled movement in their currencies as the Fed indicated that any further hike in the borrowing rates will be gradual. Core PCE inflation, which the Fed watches closely, is forecast around 1.5-1.7 percent through 2016 – similar to what Fed policymakers expect, but lower than the 2 percent target.

“The economy has shown improvement”.

“The Fed has to be patting themselves on the back given what’s happened in markets”, said Andrew Szczurowski, portfolio manager at Eaton Vance, in Boston. “There are a lot of fundamental reasons supporting higher equity prices”. “Short term this pushes down people’s inflation expectations and that’s fairly positive for European bond markets. We don’t see the risk that we have to have a dramatic pullback in equity prices just because the Fed is moving rates off zero”.