US Fed Reserve raises interest rates for second time in three months

The US Federal Reserve raised its benchmark interest rate for the second time in three months this week.

The Fed announced on Thursday that it would increase the base rate by 0.25 per cent, echoing the same increase that was made at the end of 2016, as confidence in the US ecnomy continues to climb.

“Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace,” announced the Fed Reserve Committee in a statement following its meeting. “Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 per cent.”

“The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 per cent over the medium term,” the committee added. “Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

The move brings the target range for the federal funds rate to 0.75 per cent to 1 per cent, and also sets the USA on course for the previously indicated series of several regular interest rate hikes throughout 2017.

Indeed, the hike was largely anticipated this quarter, so much so that the dollar actually fell today to a five-week low against a basket of other currencies. This was because markets had priced in the hike already, while the Federal Reserve’s comments indicated a more hawkish tone than anticipated.

The greenback slipped to a two-week low against the yen and a five-week low against the euro. Chicago-based Ron Waliczek, managing director of FX at INTL FC Stone, told CNBC that the dollar had been “overdone” and had been for several years – making this week the “perfect opportunity” for the dollar to consolidate.

“Overall, I think the dollar will continue to be under some pressure for a period of time in which the market has to digest what the Fed is saying,” he added.

The euro’s rise to 0.18 per cent against the dollar at 1.0713 was also buouyed by the Dutch election results, which saw far-right leader Geert Wilders defeating, easing concerns about a populist drift across the European Union.

At home, the National Association of Realtors Chief Economist Lawrence Yun commented on the impact of the Federal Reserve’s decision upon the housing market.

“Rising inflation will predominantly dictate the next monetary policy decision, but another short-term rate hike should be expected by the end of the summer,” he wrote in a blog post. “Right now, rents and housing costs are increasing faster than other components because of the stubborn housing shortages in much of the U.S. To contain inflation and slow the pace of future rate hikes, more home construction is needed now.”

Mortgage rates tend to follow the benchmark rate, with rates already rising more than 0.25 percentage points in recent weeks. As a result, the NAR suggests that home buyers should expect to pay around 3 per cent more each month on a loan for a $250,000 home with a 20 per cent down payment.

“The small changes we’re seeing shouldn’t price too many people out” of homeownership, says Jonathan Smoke, realtor.com’s chief economist. “But if you keep adding it on, it will price people out.”

 

US dollar surges as Fed hikes rate and Bank of England holds steady

15th December 2016

The US dollar has surged today, as the Federal Reserve announced that it will raise interest rates for only the second time since the global financial crisis.

The Federal Reserve slashed interest rates in 2008, following the financial crash, before raising rates last year for the first time in seven years to 0.25 per cent. Now, rates will be increased by 0.25 per cent to 0.5 per cent, as sentiment in the American economy is buoyed by the election of Donald Trump as the next President. Indeed, Trump is expected to step up spending and provide a significant financial stimulus to the country, building upon improving employment and inflation data.

As a result, the Federal Reserve has intimated that rates will increase several times in 2017, driving the US dollar to a 14-year high. The dollar index climbed to 102.62, reports Reuters, its highest since 2003.

The rise has implications for many markets around the world. Indeed, as traders moved to buy the dollar, traders sold off other currencies, leading to losses for the Australia, Canadian and New Zealand dollars, while the Mexican peso also weakened.

China’s yuan fell to its weakest level against the dollar in over eight years, reports The Guardian. The euro fell to a 21-month low against the US currency.

The pound is also seeing a knock-on effect, thanks to the Bank of England also announcing its own interest rate policy for the future. While the US is bullish in its outlook, the UK is about to enter a period of negotiation over its membership of the European Union. As a result, the Bank of England chose to hold its interest rate steady at 0.25 per cent, which it was lowered to in August, following June’s Brexit vote.

The Bank of England’s base rate is not expected to change for a couple of years, due to Brexit, marking a growing divergence in financial policy between the two major global players. Sharply rising swap rates, though, could see mortgage rates in the UK increase raegardless, as lenders pass on their costs to consumers. Sterling, meanwhile, fell almost two cents against the dollar to a low of $1.2509.

The dollar’s strength, which is likely to continue over the coming quarter and potentially further in 2017, will spur investment in overseas property from American buyers. Indeed, agents in France, Italy and the UK have reported US investors taking advantage of their spending power.

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