Federal Reserve Raises Interest Rate, Signals at 3 Hikes in 2017
The Federal Reserve decided - in line with expectations - to raise its benchmark Fed Funds Rate by 0.25 percent to the range of 0.50 - 0.75 percent, exactly one year after its first rate hike (in a decade). Furthermore, the Fed Chair Janet Yellen also indicated it sees three more interest rate hikes in 2017. This is a bit more hawkish than markets expected. Tighter monetary policy in the USA is required as the US labor market and growth in household spending improves. Inflation has also improved but remains below the Fed's 2 percent (y/y) target. Business investment, however, remains soft.
Still, the tighter monetary policy stance implies that the US Federal Reserve sees an improving US economy although Yellen emphasized the Fed’s outlook may change as fiscal policy takes shape. Donald Trump, who will be inaugurated as US president in January 2017, remains the 'unknown factor'. Overnight stocks in the USA fell, experiencing their worst day in two months, due to the Fed Funds Rate hike and particularly because of the Fed's hawkish stance on rate hikes next year. The Dow Jones industrial average fell 0.6 percent to 19,792.53, the Standard & Poor’s 500 index lost 0.8 percent to end at 2,253.28, and the Nasdaq composite fell 0.5 percent to 5,436.67 points.
Asian currencies and assets struggle after the news (tighter monetary policy in the USA tends to cause capital outflows, particularly from the emerging market economies). The Indonesian rupiah immediately depreciated 0.59 percent to IDR 13,373 per US dollar by 08:15 am local Jakarta time (Bloomberg Dollar Index).
For Japanese stocks the stronger US dollar (hence weaker yen) is a positive matter as it makes Japanese export-oriented stocks more attractive. For other Asian markets it is expected to be a tough day.
The strengthening US dollar also had a negative impact on crude oil prices (which had already been affected by concerns about a new oversupply after a recent price rally). Brent crude futures fell 3.3 percent on Wednesday (14/12) to USD $53.72 per barrel, while US crude slipped to USD $50.87 per barrel, down 6.7 percent from its near 1.5-year peak on Monday (12/12).