After months of speculation, the US Federal Reserve has decided to raise interest rates by 25 basis points to 0.50 per cent. The rate rise decision – the first since June 2006 – brings an end to the zero-interest rate era and points to a stronger US economic growth.
“The commencement of interest rate normalisation in the US was broadly expected by the market and was also our base case scenario,” said Marilyn Watson, head of the global unconstrained product strategy team at BlackRock. “With this initial step, very little has changed in markets and our view of markets has not altered.”
She further explains that the Fed rate hike is more than symbolic and means that for the first time we are starting to see monetary policy divergence between the major central banks, with the activity beginning to branch out purely from monetary easing.
While some market analysts believe this should have been done six months ago, many others have welcomed the move from Fed chair Janet Yellen, saying there couldn’t be a better time with unemployment levels at a seven-year low and stable jobs growth over the past few months. With fairly strong economic data, the Fed is confident the US economy will continue growing.
However, the last time the Fed signalled a hawkish move, it sent emerging markets into risky territory. “Emerging markets have been discounting this along with the pressure that has come from the fact so many of them are primary resource producers and given that the prices of primary resources have collapsed,” said Marc Ostwald, a strategist at ADM Investor Services.
He further explains that we have got to a period where, for some emerging economies, this might be an opportunity from an investment point of view, while the vulnerable ones will continue to face risks.
But while risks remain, it is also true that markets ended the year with a sigh of relief after months of speculation came to an end. But what does this mean for markets in the coming year?
“I think there is considerable uncertainty. In 2016, a lot of it is going to stand and fall on what happens with inflation globally and that stands and falls largely with what happens with oil prices,” Mr Ostwald said.
