December, barring an accident

This morning, the US Federal Reserve dealt with one of the most important investment uncertainties. US interest rates will rise in December, barring a significant change in conditions. In its statement the Fed shifted its language in three important areas, and lifting US rates is now a question of “why not” rather than “why”.

This morning, the US Federal Reserve dealt with one of the most important investment uncertainties. US interest rates will rise in December, barring a significant change in conditions. In its statement the Fed shifted its language in three important areas, and lifting US rates is now a question of “why not” rather than “why”.

According to the statement, household and business investment is improving solidly, rather than the previously modest gains. The Fed is less concerned about the international outlook, and acknowledges labour market slack continues to drop. The key phrase is the conclusion:

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress — both realised and expected — toward its objectives of maximum employment and two per cent inflation”.

In other words, if the current conditions are maintained, zero interest rates are off the table this year.

Share markets responded strongly to the news. Although higher rates cost businesses more, and hurt company valuations, the confidence expressed in the US economy appeared to outweigh the negatives. Major indices rallied by more than a percent. Importantly, oil markets joined in the fun, aided by a net draw on weekly stocks but also appearing to confirm improved industrial sentiment. Futures indications for Asia Pacific markets are pointing to modest opening gains.

Naturally, higher US rates mean a stronger USD. This may stir further interest in Australian shares today, as the AUD hovers around 71 US cents, two cents lower than last week.

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