The Market Effects of Another Interest Rate Hike

Top officials of the USA central bank raised the benchmark interest rate slightly on Wednesday, as the recovering economy no longer seems to need quite as much of the boost it gets from ultra-low rates.

The Federal Reserve is also likely to raise rates at least one more time this year, unless something unexpected happens to the economy (such as a blowup this year over the debt ceiling).

This week brought additional evidence of low inflation and the recent softening has garnered the attention of the Fed, who noted in their statement that they are "monitoring inflation developments closely".

We expect another rate hike and some balance sheet normalisation before the end of the year'.

In their quarterly projections, Fed officials saw the economy growing slightly faster than previously forecast, with GDP up 2.2 per cent this year, a tenth of a percentage point higher than forecast in March.

HONG KONG: The Hong Kong Monetary Authority raised interest rates after the Fed's move, to help keep the territory's currency at a stable rate against the US dollar.

Fed futures markets now put the chances for another rate increase this year to below 50 per cent.

The Fed has not reached its 2% core inflation target over the past four years, with monthly consumer inflation released on Wednesday again weaker than expected. This would reduce its holdings of Treasury and mortgage-backed bonds, which they acquired in the wake of the financial crisis to support economic growth. This rate hike comes for the second straight time in 2017. A local expert says the US rate hike could actually help Korea resolve its massive household debt problem, which topped a staggering 1.2-trillion USA dollars in the first quarter.

The move registered swiftly in markets, with the territory's one-month interbank rate, known as HIBOR, jumping the most in six months, and a gauge of property stocks in Hong Kong retreating more than 1 percent.

The Fed said that while inflation has been low, it is expected to soon hit the 2 percent target. The decision which was taken on Wednesday was in the 8-1 vote.

USA stocks opened lower Thursday as investors continued to digest the Federal Reserve's decision to raise interest rates by a quarter point.

The majority of the panelists, 60 percent, expect mortgage rates to remain more or less unchanged in the coming week while 30 percent predict further declines.

United States rates are now at their highest level in nine years.

However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

  • Zachary Reyes