InvestmentsDec 17 2015

Markets bounce as Fed finally hikes rates

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Markets bounce as Fed finally hikes rates

Global stockmarkets have reacted positively to the decision last night by the US Federal Open Market Committee (FOMC) to raise interest rates by 0.25 percentage points.

In the US the S&P 500 index closed 1.5 per cent higher at 2,073.07 while the Dow Jones index gained 1.3 per cent during trading.

Asian markets also moved higher with the Topix index in Japan adding 1.6 per cent, the Hang Seng index in Hong Kong gaining 0.8 per cent and even the Chinese Shanghai Composite index closing 1.8 per cent higher.

European markets have taken the news equally well with the FTSE 100 index climbing 1.3 per cent as at 8.16am, while the German Dax index was 2 per cent higher, with the Cac 40 index in France also gaining 2 per cent.

In the statement following the meeting the FOMC noted that “given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 0.25 to 0.5 per cent”.

Janet Yellen, chairman of the US Federal Reserve, added in her opening remarks to the press conference that the interest rate rise “marks the end of an extraordinary seven year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression”.

However, she warned that while a moderate increase was judged as an “appropriate” move, “the process of normalising interest rates is likely to proceed gradually, although future policy actions will obviously depend on how the economy evolves relative to our objectives”.

Ben Brettell, senior economist at Hargreaves Lansdown, noted that while an interest rate rise is a new experience for much of Wall Street, the Fed’s historic move is largely symbolic.

“Notwithstanding today’s 25 basis point rise, US monetary policy is still extremely loose. While the US economy is certainly moving in the right direction the recovery remains tepid, and yesterday’s inflation figure of just 0.5 per cent gives the Fed plenty of room to leave rates lower for longer.”