Rate hike is here at last - December 23, 2016
It took quite some time for the Fed to hike rates, but last week they made the step and raised interest rates with 25 bps. Markets expected this change for a while now and the reactions were rather like textbook examples.
Janet Yellen, leader of the board mentioned that they did the hike now because they believe that the US economy became strong enough for the higher rates. This was not unexpected as in September they already believed the economy has strengthened a lot, but they decided to wait a bit more. We – and other market analysts – expected a hike mostly for December and it happened as it was estimated.
The general interest rate on Fed funds rate was also raised to 0.5-0.75%, but according to Yellen the rate may go even higher. This is a welcome change for the markets, as rates close to 0 are not good for the economy. Negative rates cause shrinking savings on bank accounts and may lead people to investments with unnecessary risks. We wrote in May for example, an interest rate around 1-2% would be ideal for everyone. Now this can happen, helping banks to lend more money, therefore help economic growth.
So far the market reactions were textbook examples. The USD strengthened 1% against the Euro, the US stock indexes fell a little bit as it can be seen on the chart below. Overseas yields rose, reaching the levels of 2009, but all this was expected.
What can we expect in the future? The aforementioned hike may continue for a while as Yellen said. What’s more, president-elect Donald Trump prefers higher rates so from his side there may be a pressure on the Fed to go on with this procedure. Fed's dot-plot projection foresees three rate hikes for 2017,but markets are expecting just two raises. We will see that how global markets are moving next year because this time last year Fed's dot-plot had forecasted 3 or 4 rate hikes but they did only one step forward.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving high returns on their investments.