United States stocks open lower after Fed rate hike

Xavier Trudeau
Juin 20, 2017

Reaction was muted on financial markets to the Federal Reserve's latest rate increase, which was widely expected by investors.

The shekel continues strengthening against the dollar and against the euro today despite last night's decision by the US Federal Reserve to raise interest rates.

In lifting its benchmark lending rate by a 0.25% to a target range of 1.00 to 1.25% and forecasting 1 more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data. The prime rate will rise to 4.25 percent from 4 percent. Higher rates make it more expensive for companies and consumers to borrow money, affecting everything from loans to credit card rates to home mortgages. The surprisingly weak inflation and other data overshadowed the Fed's rate hike.

The tightened monetary policy had a moderate effect on Wall Street, with the Nasdaq Composite and the Dow Jones falling by 0.41% and 0.10% respectively upon market closure.

Financial markets have been anticipating the increase.

In view of realised and expected labour market conditions and inflation, Federal Open Markets Committee (FOMC) made a decision to raise the target range for the federal fund's rate to 1 to 1-1/4%.

Earlier on Thursday, the People's Bank of China fixed the yuan's mid-point rate at 6.7852 per United States dollar, the strongest level since November. Fed leaders, including Chair Janet Yellen, suggested they still expect to raise rates again later in the year.

Despite another interest rate hike by the Federal Reserve, mortgage rates are hovering at the lowest point since mid-November and are little changed from where they were 18 months ago when the Fed started boosting interest rates.

A second reason to hike was that the Fed wanted to announce today - in an "Addendum to the Policy Normalization Principles and Plans" - details for its process of normalizing its $4.5 trillion balance sheet.

Of course, the Fed has been awful at predicting inflation in the past. But inflation has been tame - at least, it's been low by the Fed's favorite measurement. Annual inflation is running at 1.7 percent. In a show of confidence, the Fed also upgraded its economic growth forecast and unemployment for the U.S.in 2017. That dynamic spurs economic growth. "But you listen to the comments yesterday, and they're still on the aggressive side as far as raising rates", said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

So there's more to this increase than the effort to keep inflation under control. The rise represents the third hike in six months and pushes the key rate to levels not seen since 2008.

Underlying trends in the dollar and bond yields will dominate in the short term, although a very sharp slide in equity markets would tend to underpin gold, especially if President Trump comes under renewed pressure.

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