The US Federal reserve lifted interest rates overnight, ending the zero interest rate era. Market reactions were calm and positive. Shares rallied, the USD fell slightly and bond rates rose modestly. The Fed clearly defined a data dependent path back to “normal” monetary conditions, but the unresolved differences over the timing of future hikes between Fed board and interest rate markets could yet see disruption.
Subtle shifts in the board statement language point to more confidence in the economy. A “balanced” economy, and inflation heading “to” rather than “towards” 2% appears to have swung any doubters, and the eventual vote was unanimous. Inflation and employment will be the drivers of future moves, and the current accommodative stance remains in place. This means holdings of maturing bonds will be rolled forward, maintaining liquidity.
Investors responded to the positive signalling coming from the Fed. After an initial wobble as the decision was released the SP500 Index rose by more than 1%, and the positive outlook spread Energy stocks were the only group to fall, undermined by a build in weekly inventory numbers that showed reserves at record levels.
Futures markets are pointing to gains across the Asia Pacific region at this morning’s opening. However, there may be a challenge in holding onto any opening gains, given the 2-2.5% rally seen across the region yesterday. The expiry of the December SPI futures contract this morning could see double an average day’s turnover, and large investors will likely take advantage of the enhanced liquidity at the opening.