Markets Lift with Fed
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.
Frequently Asked Questions about this Article…
The US Federal Reserve's interest rate hike led to a positive market reaction. Shares rallied, the USD fell slightly, and bond rates rose modestly. The SP500 Index increased by more than 1% after the decision was released.
Ending the zero interest rate era marks a shift towards normal monetary conditions. It indicates the Fed's confidence in the economy's balance and inflation moving towards the 2% target, which could influence future interest rate hikes.
Energy stocks fell due to a build in weekly inventory numbers, which showed reserves at record levels. This undermined the positive market sentiment that followed the Fed's interest rate decision.
Future interest rate hikes by the Federal Reserve will be influenced by inflation and employment data. The Fed has adopted a data-dependent approach to determine the timing of future rate changes.
Futures markets pointed to gains across the Asia Pacific region following the Federal Reserve's decision. However, there is a challenge in maintaining these gains due to the previous day's rally and the expiry of the December SPI futures contract.
The Federal Reserve's accommodative stance means that it will continue to roll forward holdings of maturing bonds, maintaining liquidity in the market. This approach supports economic growth while monitoring inflation and employment.
There is potential for disruption due to unresolved differences over the timing of future interest rate hikes. The Fed board and interest rate markets may have differing views on when and how quickly rates should be adjusted.
Following the Federal Reserve's decision, the USD fell slightly, and bond rates rose modestly. These movements reflect the market's adjustment to the new interest rate environment and the Fed's economic outlook.
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