Stocks Firmly Higher in Rebound From Fed-Triggered Selloff

The Federal Reserve is raising a key interest rate for the first time in a year reflecting a resilient US economy and
Fed raises key interest rate for first time in year
Author

16 December, 2016

The US Federal Reserve raised interest rates by a quarter point on Wednesday and signalled a faster pace of increases in 2017.

The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent.

The Fed sees three rate hikes next year instead of the two foreseen as of September, partly as a result of the changes anticipated under President-elect Donald Trump.

KEEPING SCORE: The Standard & Poor's 500 index rose 10 points, or 0.5 percent, to 2,263 as of 10 a.m. Benchmark U.S. crude fell $1.94 to settle at $51.04 per barrel in NY.

"What the Fed has actually said and (Federal Reserve chair) Yellen said at the press conference is all still very cautious", said Philip Borkin, senior economist at ANZ Bank New Zealand. While West Texas Intermediate oil dropped $1.94 to $51.04 a barrel on the New York Mercantile Exchange, Brent fell $1.82, or 3.3 percent, to $53.90 a barrel.

The Fed's move Wednesday, only the second rate hike in the past decade, came on a unanimous 10-0 vote. While stocks have rallied and bonds have tumbled since Donald Trump's election fueled such expectations, the US central bank stands largely alone in actively tightening policy, a stance that's sent the dollar surging.

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"While there still remains a cloud of uncertainty over how economic policy may change under Trump's presidency, the same rising optimism towards Trump boosting USA growth through tax cuts and infrastructure spending may have played a key part in the changes to the Fed's projections", said Lukman Otunuga, a research analyst with FXTM. The worry is that traditional bond investors who had defected to dividend stocks will return to bonds now that yields are rising again. Higher interest rates could help banks reap bigger profits from making loans.

United States consumer prices moderated in November, but the underlying trend continued to point to firming inflation pressures.

"There are a few problems occurring together", James Yip, a Hong Kong-based money manager, told Bloomberg News. That means potential returns on dollar holdings will be even higher. A strong USA market will mean a flight of capital from countries such as India, as U.S. investors will have an extra incentive to invest their money back home rather than in riskier regions.

As the US economy has gained ground since the financial meltdown of 2008-09, the Fed has been aiming to bring interest rates back to a more normal level and away from the emergency range of almost 0%.

According to ratings agency Standard & Poor's, Asia-Pacific companies will have to repay nearly $1 trillion of debt over the next four years, with more than half of it priced in USA dollars.

While the decision to lift rates had been a certainty, a plan to hike them three times rather than the expected twice jolted trading floors.


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