The Federal Reserve hiked the US benchmark interest rates by a quarter of a point yesterday bringing the interest rates to 0.25% – 0.50%. For what was touted to be the ‘Big event‘ of the year, the markets reacted rather calmly and for the uninitiated, yesterday’s FOMC meeting could have very well passed off as just another one of those Central bank meetings. The newswires continue to churn out opinion pieces both against and for the rate hikes but all said and done, the bottom line being the fact that the Fed rate hike yesterday was as smooth as it could be.
[Tweet “The Federal Reserve increased the US interest rates by a quarter of a point. Markets reacted calmly “]
While there was some volatility after the initial release with Gold prices making the big move spiking nearly $15, Gold eventually settled the day with 1.03% gains. Normalcy returned to the markets rather quickly reflecting the Fed’s job on communicating its rate hike intentions and making the transition rather smoothly. The US Dollar Index closed yesterday with gains of 0.41%, closing at $98.58 after testing the lows of $97.65. Prices are well supported with the Dollar Index finding support near the 50 period EMA. EURUSD saw a rather subdued move and nothing in comparison to the price action seen on December 4th’s ECB meeting. USDJPY was also rather calm and closed the day with gains of 0.46%, closing the day at 122.2Yen. On the equity front, the US S&P500 index closed with gains of 1.07% for the day at 2067. A full copy of the Fed’s press release can be accessed from here.
Summary of December 16th FOMC Meeting
- After a decade of low-interest rates, the Fed finally got the benchmark interest rates off with a 25bps rate hike, bring the US interest rates to the range of 25% – 0.50%
- The Fed noted the improvement in the labour market which is on track and believes that the US unemployment rate will fall further during 2016 – 2018
- The stronger US Dollar and improved labor markets signal that inflation is likely to increase in the coming quarters. US inflation stands at 2.0% annualized in November
- The FOMC expects to hike rates four times next year (2016) and another four times in 2017, bringing the US benchmark interest rates to 50% by 2016 and 2.50% by 2017.
- The key to hiking interest rates will be based on continued momentum in the labour markets and global growth aka the Fed remains ‘data dependent‘ on further hikes
[Tweet “The FOMC expects to hike rates four times next year (2016) and another four times in 2017”]
Summary of FOMC Staff Economic Projections
- The Fed expects 2015 annualized GDP to grow between 2.0% – 2.20% in 2015 and range between 2.0% – 2.70% in 2016
- The Fed expects US unemployment rate to steady at 5.0% in 2015 and to range between 4.30% and 4.90% in 2016
- PCE Inflation is expected to remain within 0.30% – 0.50% in 2015 and rise to 1.20% – 2.10% in 2016
- The Fed funds rate is expected to be between 0.90% – 2.10% by 2016
Key takeaways: Overall, the Fed’s staff economic projections were all optimistic broadly being revised higher, indicating that the Federal Reserve remains upbeat on US economy continuing to lead the way at a steady pace of growth.
A full copy of the Fed’s Staff Economic Projections or SEP can be accessed from here.
